|                                                                                        
|----------------------------------------------------------------------------------------
|UNITED STATES SECURITIES AND EXCHANGE COMMISSION                                        
|Washington D.C. 20549                                                                   
|                                                                                        
|                                                                                        
|                                                                                        
|FORM 10-Q                                                                               
|                                                                                        
|                                                                                        
|                                                                                        
|QUARTERLY REPORT PURSUANT
 TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the quarterly period
 ended June 30, 2009                                           
|                                                                                        
|Commission
 File Number 0-20050                                                         
|                                                                                        
|                                                                                        
|                                                                                        
|PRINCETON NATIONAL BANCORP, INC.                                                        
|(Exact
 name of registrant as specified in its charter)                                 

|                                   |                                      
|---------------------------------- | -------------------------------------
|Delaware                           | 36-3210283                           
|(State
 or other jurisdiction      | (I.R.S.
 Employer Identification No.)
|of
 incorporation or organization) |                                      

|                                                      
|------------------------------------------------------
|606 S. Main Street, Princeton, IL 61356               
|(Address
 of principal executive offices and Zip Code)
|                                                      
|(815) 875-4444                                        
|(Registrants
 telephone number, including area code) 
|                                                      
|                                                      

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.

Yes x No o

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
twelve months (or for such shorter period that the registrant was required to
submit and post such files).

Yes o No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.

|                           |  |  
|-------------------------- |  | -
|Large
 accelerated filer   |  | o
|Accelerated
 filer         |  | x
|Non-accelerated
 filer     |  | o
|Smaller
 reporting company |  | o

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).

Yes o No x

As of July 8, 2009, the
registrant had outstanding 3,302,157 shares of its $5 par value common stock.

Page 1 of 41 pages







Part I: FINANCIAL INFORMATION

The
unaudited consolidated financial statements of Princeton National Bancorp, Inc.
and Subsidiary and managements discussion and analysis of financial condition
and results of operation are presented in the schedules as follows:

| |             |                                                                                       
| | ----------- | --------------------------------------------------------------------------------------
| | Schedule 1: | Consolidated
 Balance Sheets                                                          
| | Schedule 2: | Consolidated
 Statements of Income                                                    
| | Schedule 3: | Consolidated
 Statements of Stockholders Equity                                      
| | Schedule 4: | Consolidated
 Statements of Cash Flows                                                
| | Schedule 5: | Notes to
 Consolidated Financial Statements                                           
| | Schedule 6: | Managements Discussion and Analysis of
 Financial Condition and Results of Operations
| | Schedule 7: | Controls and
 Procedures                                                              

Part II: OTHER INFORMATION

Item 1A. Risk Factors

The
current volatility in economic conditions and the financial markets may
adversely affect our industry, business and financial performance. There have
been unprecedented disruptions in financial markets in the past nine months,
including volatility in asset values and constraints on the availability of
credit. In response to these developments, the U.S. government has taken, and
may take further, steps designed to stabilize markets generally and strengthen
financial institutions in particular. The impact, if any, these financial
market events or these governmental actions might have on the Company and its
business is still uncertain and cannot be estimated at this time. Item 1A
(Risk Factors) of the Companys Annual Report on Form 10-K for the year ended
December 31, 2008 discusses some of the principal risks inherent in the
Companys business, including interest rate risks, liquidity risks, credit
risks, operational risks, risks from economic or market conditions and general
business risks among others. The current upheaval in financial markets has
accentuated each of these risks and magnified their potential effect on the
Company.

At
the same time, there has been a general weakening of the U.S. economy. To the
extent these economic developments continue to worsen, and to the extent
legislation or regulatory action adversely affects the U.S. economy, the
Companys access to capital or the credit quality of the Companys loan
portfolio, or imposes additional limitations or costs on the Companys
business, there could be an adverse impact on the Companys costs, credit
losses, access to capital or liquidity.

2

---



Item 4. Submission of
Matters to a Vote of Security Holders

The
Annual Meeting of Shareholders of Princeton National Bancorp, Inc. was held on
April 28, 2009, for the purpose of electing four directors to serve for a term
of three years. Proxies for the meeting were solicited by Management pursuant
to Regulation 14A under the Securities Exchange Act of 1934, and there was no
solicitation in opposition to Managements solicitation.

All
four of the nominees for director listed in the proxy statement were elected.
The results of the vote were as follows:

|                 |  |                      |           |                    |  |         |  |  |   | 
|---------------- |  | -------------------- | --------- | ------------------ |  | ------- |  |  | - | 
|                 |  | Shares
 Voted
 For |           | Shares
 Withheld |  | Abstain | 
|                 |  |                      |           |                    |  |         |  |  |   | 
|Gretta E. Bieber |  |                      | 2,783,748 |                    |  | 119,056 |  |  | 0 | 
|Gary C.
 Bruce   |  |                      | 2,762,484 |                    |  | 140,320 |  |  | 0 | 
|John R.
 Ernat   |  |                      | 2,804,989 |                    |  | 97,815  |  |  | 0 | 
|Tony J.
 Sorcic  |  |                      | 2,788,517 |                    |  | 114,287 |  |  | 0 | 

In
addition, the following directors terms of office continued after the meeting:

|                  |                   |                  
|----------------- | ----------------- | -----------------
|Daryl Becker      | Mark Janko        | Stephen W.
 Samet
|Sharon L.
 Covert | Willard Lee       | Craig O.
 Wesner 
|Donald E.
 Grubb  | Ervin I.
 Pietsch |                  

Item 6. Exhibits

| |      |                                                                                                                                         
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certification
 of Tony J. Sorcic required by Rule 13a-14(a).                                                                            
| |      |                                                                                                                                         
| | 31.2 | Certification
 of Todd D. Fanning required by Rule 13a-14(a).                                                                           
| |      |                                                                                                                                         
| | 32.1 | Certification of Tony J. Sorcic required by
 Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
 Section 1350. 
| |      |                                                                                                                                         
| | 32.2 | Certification of Todd D. Fanning required
 by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18
 U.S.C. Section 1350.

3

---



SIGNATURES

Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

PRINCETON NATIONAL
BANCORP, INC.

|   |                                     |  |    |                                 
|-- | ----------------------------------- |  | -- | --------------------------------
|By | /s/ Tony J. Sorcic                  |  | By | /s/ Todd D. Fanning             
|   | Tony J.
 Sorcic                     |  |    | Todd D. Fanning                 
|   | President & Chief Executive Officer |  |    | Sr. VP & Chief Financial Officer
|   | July 27,
 2009                      |  |    | July 27,
 2009                  

4

---



Schedule 1

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
CONSOLIDATED BALANCE SHEETS(dollars in thousands, except share data)

|                                                                                                                   |  |                             |           |                    |   |           |  
|------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | --------- | ------------------ | - | --------- | -
|                                                                                                                   |  | June 30,
 2009
 (unaudited) |           | December 31,
 2008 |  
|ASSETS                                                                                                             |  |                             |           |                    |   |           |  
|Cash and due
 from banks                                                                                           |  | $                           | 12,741    |                    | $ | 20,163    |  
|Interest-bearing
 deposits with financial institutions                                                             |  |                             | 35,929    |                    |   | 98        |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|Total cash and cash equivalents                                                                                    |  |                             | 48,670    |                    |   | 20,261    |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|Loans held
 for sale, at lower of cost or market                                                                   |  |                             | 2,766     |                    |   | 2,155     |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|Investment
 securities:                                                                                            |  |                             |           |                    |   |           |  
|Available-for-sale, at fair value                                                                                  |  |                             | 317,514   |                    |   | 236,883   |  
|Held-to-maturity, at amortized cost (fair
 value of $15,568 and $14,461)                                           |  |                             | 15,186    |                    |   | 14,232    |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|Total investment securities                                                                                        |  |                             | 332,700   |                    |   | 251,115   |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|Loans:                                                                                                             |  |                             |           |                    |   |           |  
|Loans, net of unearned interest                                                                                    |  |                             | 765,754   |                    |   | 790,837   |  
|Allowance for loan losses                                                                                          |  |                             | (6,160    | )                  |   | (5,064    | )
|                                                                                                                   |  |                             |           |                    |   |           |  
|Net loans                                                                                                          |  |                             | 759,594   |                    |   | 785,773   |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|Premises and
 equipment, net of accumulated depreciation                                                           |  |                             | 28,935    |                    |   | 29,297    |  
|Land held
 for sale, at lower of cost or market                                                                    |  |                             | 2,354     |                    |   | 2,354     |  
|Federal
 Reserve and Federal Home Loan Bank stock                                                                  |  |                             | 4,230     |                    |   | 4,211     |  
|Bank-owned
 life insurance                                                                                         |  |                             | 22,072    |                    |   | 21,588    |  
|Accrued
 interest receivable                                                                                       |  |                             | 7,840     |                    |   | 9,693     |  
|Other real
 estate owned                                                                                           |  |                             | 15,250    |                    |   | 2,487     |  
|Goodwill                                                                                                           |  |                             | 24,521    |                    |   | 24,521    |  
|Intangible
 assets, net of accumulated amortization                                                                |  |                             | 3,776     |                    |   | 4,207     |  
|Other assets                                                                                                       |  |                             | 5,346     |                    |   | 5,468     |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|TOTAL ASSETS                                                                                                       |  | $                           | 1,258,054 |                    | $ | 1,163,130 |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|LIABILITIES                                                                                                        |  |                             |           |                    |   |           |  
|Deposits:                                                                                                          |  |                             |           |                    |   |           |  
|Demand                                                                                                             |  | $                           | 108,952   |                    | $ | 110,559   |  
|Interest-bearing demand                                                                                            |  |                             | 289,432   |                    |   | 246,714   |  
|Savings                                                                                                            |  |                             | 67,144    |                    |   | 61,089    |  
|Time                                                                                                               |  |                             | 590,129   |                    |   | 543,770   |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|Total deposits                                                                                                     |  |                             | 1,055,657 |                    |   | 962,132   |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|Borrowings:                                                                                                        |  |                             |           |                    |   |           |  
|Customer repurchase agreements                                                                                     |  |                             | 35,621    |                    |   | 35,532    |  
|Federal funds purchased                                                                                            |  |                             | 0         |                    |   | 6,500     |  
|Interest-bearing demand notes issued to the
 U.S. Treasury                                                         |  |                             | 1,516     |                    |   | 2,441     |  
|Advances from the Federal Home Loan Bank                                                                           |  |                             | 32,496    |                    |   | 32,493    |  
|Trust preferred securities                                                                                         |  |                             | 25,000    |                    |   | 25,000    |  
|Note payable                                                                                                       |  |                             | 0         |                    |   | 16,050    |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|Total borrowings                                                                                                   |  |                             | 94,633    |                    |   | 118,016   |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|Other
 liabilities                                                                                                 |  |                             | 9,664     |                    |   | 10,511    |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|TOTAL LIABILITIES                                                                                                  |  |                             | 1,159,954 |                    |   | 1,090,659 |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|STOCKHOLDERS EQUITY                                                                                               |  |                             |           |                    |   |           |  
|Preferred stock, no par value; 100,000
 shares authorized; 25,083 shares issued and outstanding at June 30, 2009   |  |                             | 24,944    |                    |   |          |  
|Common stock: $5 par value, 7,000,000
 shares authorized; 4,478,295 shares issued                                  |  |                             | 22,391    |                    |   | 22,391    |  
|Common stock warrants                                                                                              |  |                             | 150       |                    |   |           |  
|Additional paid-in capital                                                                                         |  |                             | 18,395    |                    |   | 18,420    |  
|Retained earnings                                                                                                  |  |                             | 55,597    |                    |   | 54,329    |  
|Accumulated other comprehensive income, net
 of taxes                                                              |  |                             | 624       |                    |   | 1,402     |  
|Less: Cost of 1,176,138 and 1,180,254
 treasury common shares at June 30, 2009 and December 31, 2008, respectively |  |                             | (24,001   | )                  |   | (24,071   | )
|                                                                                                                   |  |                             |           |                    |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                                         |  |                             | 98,100    |                    |   | 72,471    |  
|                                                                                                                   |  |                             |           |                    |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY                                                                         |  | $                           | 1,258,054 |                    | $ | 1,163,130 |  

See accompanying notes to unaudited
consolidated financial statements

5

---



Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
(dollars in thousands, except share data)

|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|--------------------------------------------------------------------- |  | ----------------------------------- | --------- | --------------------------------- | - | --------- |  | ---- | --------- |  | - | --------- | 
|                                                                      |  | For the Three Months
 Ended June 30 |           | For the Six Months
 Ended June 30 |  
|                                                                      |  | 2009                                |           | 2008                              |   | 2009      |  | 2008 |          
|Interest income:                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Interest and fees on loans                                            |  | $                                   | 11,167    |                                   | $ | 11,801    |  | $    | 22,543    |  | $ | 24,152    | 
|Interest on investment securities:                                    |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Taxable                                                               |  |                                     | 1,920     |                                   |   | 1,681     |  |      | 3,723     |  |   | 3,297     | 
|Non-taxable                                                           |  |                                     | 1,296     |                                   |   | 978       |  |      | 2,424     |  |   | 2,041     | 
|Interest on federal funds sold                                        |  |                                     | 0         |                                   |   | 4         |  |      | 0         |  |   | 29        | 
|Interest on interest-bearing time deposits
 in other banks            |  |                                     | 35        |                                   |   | 9         |  |      | 51        |  |   | 20        | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Total interest income                                                 |  |                                     | 14,418    |                                   |   | 14,473    |  |      | 28,741    |  |   | 29,539    | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Interest expense:                                                     |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Interest on deposits                                                  |  |                                     | 5,103     |                                   |   | 5,805     |  |      | 10,250    |  |   | 12,479    | 
|Interest on borrowings                                                |  |                                     | 686       |                                   |   | 851       |  |      | 1,467     |  |   | 1,789     | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Total interest expense                                                |  |                                     | 5,789     |                                   |   | 6,656     |  |      | 11,717    |  |   | 14,268    | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Net interest income                                                   |  |                                     | 8,629     |                                   |   | 7,817     |  |      | 17,024    |  |   | 15,271    | 
|Provision for loan losses                                             |  |                                     | 1,465     |                                   |   | 450       |  |      | 2,635     |  |   | 818       | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Net interest income after provision for
 loan losses                  |  |                                     | 7,164     |                                   |   | 7,367     |  |      | 14,389    |  |   | 14,453    | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Non-interest income:                                                  |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Trust & farm management fees                                          |  |                                     | 394       |                                   |   | 336       |  |      | 708       |  |   | 812       | 
|Service charges on deposit accounts                                   |  |                                     | 977       |                                   |   | 1,110     |  |      | 1,953     |  |   | 2,202     | 
|Other service charges                                                 |  |                                     | 508       |                                   |   | 567       |  |      | 953       |  |   | 1,024     | 
|Gain on sales of securities
 available-for-sale                       |  |                                     | 574       |                                   |   | 0         |  |      | 761       |  |   | 276       | 
|Brokerage fee income                                                  |  |                                     | 249       |                                   |   | 208       |  |      | 447       |  |   | 427       | 
|Mortgage banking income, net                                          |  |                                     | 765       |                                   |   | 288       |  |      | 876       |  |   | 636       | 
|Bank-owned life insurance income                                      |  |                                     | 230       |                                   |   | 206       |  |      | 473       |  |   | 421       | 
|Other operating income                                                |  |                                     | 34        |                                   |   | 36        |  |      | 148       |  |   | 106       | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Total non-interest income                                             |  |                                     | 3,731     |                                   |   | 2,751     |  |      | 6,319     |  |   | 5,904     | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Non-interest expense:                                                 |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Salaries and employee benefits                                        |  |                                     | 4,113     |                                   |   | 4,226     |  |      | 8,693     |  |   | 8,623     | 
|Occupancy                                                             |  |                                     | 602       |                                   |   | 611       |  |      | 1,311     |  |   | 1,290     | 
|Equipment expense                                                     |  |                                     | 763       |                                   |   | 751       |  |      | 1,536     |  |   | 1,470     | 
|Federal insurance assessments                                         |  |                                     | 826       |                                   |   | 84        |  |      | 1,523     |  |   | 168       | 
|Intangible assets amortization                                        |  |                                     | 208       |                                   |   | 178       |  |      | 416       |  |   | 357       | 
|Data processing                                                       |  |                                     | 339       |                                   |   | 302       |  |      | 655       |  |   | 579       | 
|Advertising                                                           |  |                                     | 211       |                                   |   | 162       |  |      | 408       |  |   | 330       | 
|Other real estate expenses, net                                       |  |                                     | 419       |                                   |   | 91        |  |      | 509       |  |   | 122       | 
|Other operating expense                                               |  |                                     | 1,234     |                                   |   | 1,104     |  |      | 2,424     |  |   | 2,130     | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Total non-interest expense                                            |  |                                     | 8,715     |                                   |   | 7,509     |  |      | 17,475    |  |   | 15,069    | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Income before income taxes                                            |  |                                     | 2,180     |                                   |   | 2,609     |  |      | 3,233     |  |   | 5,288     | 
|Income tax expense                                                    |  |                                     | 282       |                                   |   | 589       |  |      | 178       |  |   | 1,177     | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Net income                                                            |  |                                     | 1,898     |                                   |   | 2,020     |  |      | 3,055     |  |   | 4,111     | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Preferred stock dividends                                             |  |                                     | 317       |                                   |   |          |  |      | 554       |  |   |          | 
|Accretion of preferred stock discount                                 |  |                                     | 6         |                                   |   |          |  |      | 11        |  |   |          | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Net income available to common stockholders                           |  | $                                   | 1,575     |                                   | $ | 2,020     |  | $    | 2,490     |  | $ | 4,111     | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Per share information:                                                |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|BASIC net income per common share available
 to common stockholders   |  |                                     | 0.48      |                                   |   | 0.61      |  |      | 0.75      |  |   | 1.25      | 
|DILUTED net income per common share
 available to common stockholders |  |                                     | 0.48      |                                   |   | 0.61      |  |      | 0.75      |  |   | 1.24      | 
|                                                                      |  |                                     |           |                                   |   |           |  |      |           |  |   |           | 
|Basic weighted average shares outstanding                             |  |                                     | 3,300,161 |                                   |   | 3,295,998 |  |      | 3,299,119 |  |   | 3,300,030 | 
|Diluted weighted average shares outstanding                           |  |                                     | 3,300,586 |                                   |   | 3,309,084 |  |      | 3,299,634 |  |   | 3,311,735 | 

See accompanying notes to unaudited
consolidated financial statements

6

---



Schedule 3

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY(Unaudited)(dollars
in thousands except per share data)

|                                                                                                  |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    |       |   |    |        |   |   |        |  
|------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ----------- | - | ------------------- |  | ------------------------ | --- | ---------------- | - | ------------------------------------------------------------ | - | ------------- | ------ | ----- | -- | ----- | - | -- | ------ | - | - | ------ | -
|For the Six Months EndedJune 30, 2009                                                             |  | PreferredStock |        | CommonStock |   | CommonStockWarrants |  | AdditionalPaid-inCapital |     | RetainedEarnings |   | AccumulatedOtherComprehensiveIncome (Loss),net of tax effect |   | TreasuryStock |        | Total |   
|                                                                                                  |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    |       |   |    |        |   |   |        |  
|Balance, January
 1, 2009                                                                         |  | $              |       |             | $ | 22,391              |  | $                        |    |                  | $ | 18,420                                                       |   | $             | 54,329 |       | $  | 1,402 |   | ($ | 24,071 | ) | $ | 72,471 |  
|                                                                                                  |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    |       |   |    |        |   |   |        |  
|Net income                                                                                        |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               | 3,055  |       |    |       |   |    |        |   |   | 3,055  |  
|Issuance of
 25,083 shares of preferred stock and 155,025 common stock warrants, net of
 expenses |  |                | 24,933 |             |   |                     |  |                          | 150 |                  |   | (63                                                          | ) |               |        |       |    |       |   |    |        |   |   | 25,020 |  
|Dividends on
 preferred stock                                                                     |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               | (390   | )     |    |       |   |    |        |   |   | (390   | )
|Accretion on
 preferred stock discount                                                            |  |                | 11     |             |   |                     |  |                          |     |                  |   |                                                              |   |               | (11    | )     |    |       |   |    |        |   |   |       |  
|Sale of 4,116
 shares of treasury common stock                                                    |  |                |        |             |   |                     |  |                          |     |                  |   | (9                                                           | ) |               |        |       |    |       |   |    | 70     |   |   | 61     |  
|Dividends on
 common stock ($.42 per share)                                                       |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               | (1,386 | )     |    |       |   |    |        |   |   | (1,386 | )
|Stock option
 compensation expense                                                                |  |                |        |             |   |                     |  |                          |     |                  |   | 47                                                           |   |               |        |       |    |       |   |    |        |   |   | 47     |  
|Other
 comprehensive loss, net of $492 tax effect                                                 |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    | (778  | ) |    |        |   |   | (778   | )
|                                                                                                  |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    |       |   |    |        |   |   |        |  
|Balance,
 June 30, 2009                                                                           |  | $              | 24,944 |             | $ | 22,391              |  | $                        | 150 |                  | $ | 18,395                                                       |   | $             | 55,597 |       | $  | 624   |   | ($ | 24,001 | ) | $ | 98,100 |  
|                                                                                                  |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    |       |   |    |        |   |   |        |  
|For the Six
 Months Ended June 30, 2008                                                           |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    |       |   |    |        |   |   |        |  
|                                                                                                  |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    |       |   |    |        |   |   |        |  
|Balance, January
 1, 2008                                                                         |  | $              |       |             | $ | 22,391              |  | $                        |    |                  | $ | 18,275                                                       |   | $             | 51,279 |       | $  | 344   |   | ($ | 23,682 | ) | $ | 68,607 |  
|                                                                                                  |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    |       |   |    |        |   |   |        |  
|Net income                                                                                        |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               | 4,111  |       |    |       |   |    |        |   |   | 4,111  |  
|Purchase of
 20,000 shares of treasury common stock                                               |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    |       |   |    | (554   | ) |   | (554   | )
|Sale of 2,237
 shares of treasury common stock                                                    |  |                |        |             |   |                     |  |                          |     |                  |   | 21                                                           |   |               |        |       |    |       |   |    | 39     |   |   | 60     |  
|Exercise of stock
 options and re-issuance of treasury common stock (4,500 shares)                |  |                |        |             |   |                     |  |                          |     |                  |   | 20                                                           |   |               |        |       |    |       |   |    | 77     |   |   | 97     |  
|Dividends on
 common stock ($.56 per share)                                                       |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               | (1,851 | )     |    |       |   |    |        |   |   | (1,851 | )
|Stock option compensation expense                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   | 42                                                           |   |               |        |       |    |       |   |    |        |   |   | 42     |  
|Adjustment to apply EITF 06-4                                                                     |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               | (579   | )     |    |       |   |    |        |   |   | (579   | )
|Other comprehensive
 loss, net of $567 tax effect                                                 |  |                |        |             |   |                     |  |                          |     |                  |   |                                                              |   |               |        |       |    | (897  | ) |    |        |   |   | (897   | )
|                                                                                                 
|Balance, June 30,
 2008                                                                           |  | $              |       |             | $ | 22,391              |  | $                        |    |                  | $ | 18,358                                                       |   | $             | 52,960 |       | ($ | 553   | ) | ($ | 24,120 | ) | $ | 69,036 |  

See accompanying notes to unaudited consolidated
financial statements

7

---



|                                                 |           
|------------------------------------------------ | ----------
|PRINCETON NATIONAL BANCORP, INC. AND
 SUBSIDIARY | Schedule 4
|CONSOLIDATED STATEMENTS OF CASH FLOWS            |           
|(Unaudited)                                      |           
|(dollars in thousands)                           |           

|                                                                                      |  |                                   |          |      |   |         |  
|------------------------------------------------------------------------------------- |  | --------------------------------- | -------- | ---- | - | ------- | -
|                                                                                      |  | For the Six Months Ended
 June 30 |         
|                                                                                      |  | 2009                              |          | 2008 |  
|Operating activities:                                                                 |  |                                   |          |      |   |         |  
|Net income                                                                            |  | $                                 | 3,055    |      | $ | 4,111   |  
|Adjustments to reconcile net income to net
 cash provided by operating activities:    |  |                                   |          |      |   |         |  
|Depreciation                                                                          |  |                                   | 1,114    |      |   | 1,123   |  
|Provision for loan losses                                                             |  |                                   | 2,635    |      |   | 818     |  
|Amortization of intangible assets and other
 purchase accounting adjustments, net     |  |                                   | 417      |      |   | 346     |  
|Amortization (accretion) of premiums and
 discounts on investment securities, net     |  |                                   | 516      |      |   | (4      | )
|Gain on sales of securities
 available-for-sale, net                                  |  |                                   | (761     | )    |   | (276    | )
|Impairment of mortgage servicing rights                                               |  |                                   | 556      |      |   | 0       |  
|Compensation expense for vested stock
 options                                        |  |                                   | 47       |      |   | 42      |  
|Loss on sales of other real estate owned,
 net                                        |  |                                   | 49       |      |   | 2       |  
|Loans originated for sale                                                             |  |                                   | (81,492  | )    |   | (55,832 | )
|Proceeds from sales of loans originated for
 sale                                     |  |                                   | 80,881   |      |   | 53,436  |  
|Increase (decrease) in accrued interest
 payable                                      |  |                                   | 53       |      |   | (568    | )
|Decrease in accrued interest receivable                                               |  |                                   | 1,853    |      |   | 2,112   |  
|(Increase) decrease in other assets                                                   |  |                                   | (1,022   | )    |   | 736     |  
|Decrease in other liabilities                                                         |  |                                   | (344     | )    |   | (786    | )
|                                                                                      |  |                                   |          |      |   |         |  
|Net cash provided by operating activities                                             |  |                                   | 7,557    |      |   | 5,260   |  
|                                                                                      |  |                                   |          |      |   |         |  
|Investing activities:                                                                 |  |                                   |          |      |   |         |  
|Proceeds from sales of investment
 securities available-for-sale                      |  |                                   | 41,310   |      |   | 8,670   |  
|Proceeds from maturities of investment
 securities available-for-sale                 |  |                                   | 38,630   |      |   | 28,679  |  
|Purchase of investment securities
 available-for-sale                                 |  |                                   | (161,550 | )    |   | (41,644 | )
|Proceeds from maturities of investment
 securities held-to-maturity                   |  |                                   | 1,105    |      |   | 1,130   |  
|Purchase of investment securities
 held-to-maturity                                   |  |                                   | (2,105   | )    |   | (1,594  | )
|Proceeds from sales of other real estate
 owned                                       |  |                                   | 226      |      |   | 736     |  
|Net decrease (increase) in loans                                                      |  |                                   | 10,545   |      |   | (24,902 | )
|Purchases of premises and equipment                                                   |  |                                   | (752     | )    |   | (696    | )
|                                                                                      |  |                                   |          |      |   |         |  
|Net cash used in investing activities                                                 |  |                                   | (72,591  | )    |   | (29,621 | )
|                                                                                      |  |                                   |          |      |   |         |  
|Financing activities:                                                                 |  |                                   |          |      |   |         |  
|Net increase in deposits                                                              |  |                                   | 93,525   |      |   | 12,866  |  
|Net (decrease) increase in borrowings                                                 |  |                                   | (23,387  | )    |   | 12,538  |  
|Dividends on common stock                                                             |  |                                   | (1,386   | )    |   | (1,851  | )
|Dividends on preferred stock                                                          |  |                                   | (390     | )    |   |        |  
|Purchases of treasury common stock                                                    |  |                                   |         |      |   | (554    | )
|Sales of treasury common stock                                                        |  |                                   | 61       |      |   | 60      |  
|Exercise of stock options and issuance of
 treasury stock                             |  |                                   |         |      |   | 97      |  
|Proceeds from issuance of preferred stock
 and common stock warrants, net of expenses |  |                                   | 25,020   |      |   |        |  
|                                                                                      |  |                                   |          |      |   |         |  
|Net cash provided by financing activities                                             |  |                                   | 93,443   |      |   | 23,156  |  
|                                                                                      |  |                                   |          |      |   |         |  
|Increase (decrease) in cash and cash
 equivalents                                     |  |                                   | 28,409   |      |   | (1,205  | )
|Cash and cash equivalents at beginning of
 period                                     |  |                                   | 20,261   |      |   | 27,604  |  
|                                                                                      |  |                                   |          |      |   |         |  
|Cash and cash equivalents at June 30                                                  |  | $                                 | 48,670   |      | $ | 26,399  |  
|                                                                                      |  |                                   |          |      |   |         |  
|                                                                                      |  |                                   |          |      |   |         |  
|                                                                                      |  |                                   |          |      |   |         |  
|Supplemental disclosures of cash flow
 information:                                   |  |                                   |          |      |   |         |  
|Cash paid during the period for:                                                      |  |                                   |          |      |   |         |  
|Interest                                                                              |  | $                                 | 11,664   |      | $ | 14,836  |  
|Income taxes                                                                          |  | $                                 | 820      |      | $ | 1,588   |  
|                                                                                      |  |                                   |          |      |   |         |  
|Supplemental disclosures of non-cash flow
 activities:                                |  |                                   |          |      |   |         |  
|Loans transferred to other real estate
 owned                                         |  | $                                 | 13,038   |      | $ | 756     |  

See accompanying notes to unaudited
consolidated financial statements

8

---



Schedule 5

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARYNotes to Consolidated Financial Statements
(Unaudited)

The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results of the three-month and six-month periods ended June
30, 2009 and 2008, and all such adjustments are of a normal recurring nature.
The 2008 year-end consolidated balance sheet data was derived from audited
financial statements, but do not include all disclosures required by generally
accepted accounting principles.

The
unaudited consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
required by accounting principles generally accepted in the United States of
America for complete financial statements and related footnote disclosures. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered for a fair presentation of the results for the interim
period have been included. For further information, refer to the consolidated
financial statements and notes included in the Registrants 2008 Annual Report
on Form 10-K. Results of operations for interim periods are not necessarily
indicative of the results that may be expected for the year. Certain amounts in
the 2008 consolidated financial statements have been reclassified to conform to
the 2009 presentation.

(1) CAPITAL PURCHASE PROGRAM

On
January 23, 2009, the Corporation received $25,083 of equity capital by issuing
to the United States Department of Treasury 25,083 shares of the Corporations
5.00% Series B Fixed Rate Cumulative Perpetual Preferred Stock, no par value,
with a liquidation preference of $1,000 per share and a ten-year warrant to
purchase up to 155,025 shares of the Corporations common stock, par value
$0.01 per share, at an exercise price of $24.27 per share. The proceeds
received were allocated to the preferred stock and common stock warrants based
on their relative fair values. The resulting discount on the preferred stock is
amortized against retained earnings and is reflected in the Corporations
consolidated statement of income as Preferred shares dividends, resulting in
additional dilution to the Corporations earnings per common share. The
warrants are immediately exercisable, in whole or in part, over a term of 10
years. The warrants were included in the Corporations diluted average common
shares outstanding (subject to anti-dilution). Both the preferred securities
and warrants were accounted for as additions to the Corporations regulatory
Tier 1 and total capital.

The
Series B Preferred stock is not mandatorily redeemable and will pay cumulative
dividends at a rate of 5% per year for the first five years and 9% per year
thereafter. Any redemption requires Federal Reserve approval. The Series B
Perpetual Preferred stock ranks senior to the Corporations existing authorized
Series A Junior Participating Preferred stock.

A
company that participates must adopt certain standards for executive
compensation, including (a) prohibiting golden parachute payments as defined
in the Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive
Officers; (b) requiring recovery of any compensation paid to senior Executive
Officers based on criteria that is later proven to be materially inaccurate;
(c) prohibiting incentive compensation that encourages unnecessary and
excessive risks that threaten the value of the financial institution; and (d)
accept restrictions on the payment of dividends and the repurchase of common
stock.

9

---



(2) EARNINGS PER SHARE CALCULATION

The
following table sets forth the computation of basic and diluted earnings per
share for the periods indicated (in thousands, except share data):

|                                                                    |  |                              |           |                            |   |           |  |      |           |  |   |           | 
|------------------------------------------------------------------- |  | ---------------------------- | --------- | -------------------------- | - | --------- |  | ---- | --------- |  | - | --------- | 
|                                                                    |  | Three Months Ended
 June 30, |           | Six Months Ended
 June 30, |  
|                                                                    |  | 2009                         |           | 2008                       |   | 2009      |  | 2008 |          
|Numerator:                                                          |  |                              |           |                            |   |           |  |      |           |  |   |           | 
|Net
 income available to common stockholders                        |  | $                            | 1,575     |                            | $ | 2,020     |  | $    | 2,490     |  | $ | 4,111     | 
|                                                                    |  |                              |           |                            |   |           |  |      |           |  |   |           | 
|Denominator:                                                        |  |                              |           |                            |   |           |  |      |           |  |   |           | 
|Basic
 earnings per share-weighted average common shares            |  |                              | 3,300,161 |                            |   | 3,295,998 |  |      | 3,299,119 |  |   | 3,300,030 | 
|                                                                    |  |                              |           |                            |   |           |  |      |           |  |   |           | 
|Effect
 of dilutive securities-stock options                        |  |                              | 425       |                            |   | 13,086    |  |      | 515       |  |   | 11,705    | 
|                                                                    |  |                              |           |                            |   |           |  |      |           |  |   |           | 
|Diluted
 earnings per share-adjusted weighted average common shares |  |                              | 3,300,586 |                            |   | 3,309,084 |  |      | 3,299,634 |  |   | 3,311,735 | 
|                                                                    |  |                              |           |                            |   |           |  |      |           |  |   |           | 
|Net income per share available to common stockholders:              |  |                              |           |                            |   |           |  |      |           |  |   |           | 
|                                                                    |  |                              |           |                            |   |           |  |      |           |  |   |           | 
|Basic                                                               |  | $                            | 0.48      |                            | $ | 0.61      |  | $    | 0.75      |  | $ | 1.25      | 
|Diluted                                                             |  | $                            | 0.48      |                            | $ | 0.61      |  | $    | 0.75      |  | $ | 1.24      | 

The
following shares were not considered in computing diluted earnings per share
for the three-month and six-month periods ended June 30, 2009 and 2008 because
they were anti-dilutive:

|                                                                                |  |                                      |         |      |  |         | 
|------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | ---- |  | ------- | 
|                                                                                |  | Three and Six Months Ended
 June 30, |        
|                                                                                |  | 2009                                 |         | 2008 | 
|Stock
 options to purchase shares of common stock                               |  |                                      | 456,627 |      |  | 279,816 | 
|                                                                                |  |                                      |         |      |  |         | 
|Average
 dilutive potential common shares associated with common stock warrants |  |                                      | 155,025 |      |  |        | 

(3) GOODWILL AND INTANGIBLE ASSETS

The
balance of goodwill, net of accumulated amortization, totaled $24,521,000 at
June 30, 2009 and December 31, 2008. The balance of intangible assets, net of
accumulated amortization, totaled $3,776,000 and $4,207,000 at June 30, 2009
and December 31, 2008, respectively.

The
Corporation had a goodwill impairment study performed as of March 31, 2009 and
December 31, 2008. If the implied fair value of goodwill is lower than its
carrying amount, goodwill impairment is indicated and goodwill is written down
to its implied fair value. Subsequent increases in goodwill value are not
recognized in the financial statements. In the three-month period since the
last impairment test, the Corporations earnings and stock price have improved.
Therefore, there were no impairment indicators which warranted a third party
study of goodwill impairment during the second quarter. Accordingly, there was
no impairment deemed necessary as of June 30, 2009.

10

---



The
following table summarizes the Corporations intangible assets, which are
subject to amortization, as of June 30, 2009 and December 31, 2008:

|                        |  |                        |       |                           |   |                        |   |                           |       |  |   |        |  
|----------------------- |  | ---------------------- | ----- | ------------------------- | - | ---------------------- | - | ------------------------- | ----- |  | - | ------ | -
|(in thousands)          |  |                        |       |                           |   |                        |   |                           |       |  |   |        |  
|                        |  |                        |       |                           |   |                        |   |                           |       |  |   |        |  
|                        |  | June 30, 2009          |       | December 31, 2008         |  
|                        |  | Gross Carrying
 Amount |       | Accumulated
 Amortization |   | Gross Carrying
 Amount |   | Accumulated
 Amortization |      
|                        |  |                        |       |                           |   |                        |   |                           |       |  |   |        |  
|Core deposit intangible |  | $                      | 9,004 |                           | $ | (5,292                 | ) | $                         | 9,004 |  | $ | (4,869 | )
|Other intangible assets |  |                        | 234   |                           |   | (170                   | ) |                           | 234   |  |   | (162   | )
|Total                   |  | $                      | 9,238 |                           | $ | (5,462                 | ) | $                         | 9,238 |  | $ | (5,031 | )

Amortization
expense of all intangible assets totaled $416,000 for the six months ended June
30, 2009 and $357,000 for the six months ended June 30, 2008, respectively. The
amortization expense of these intangible assets will be approximately $416,000
for the remaining two quarters in 2009.

(4) ORIGINATED MORTGAGE SERVICING RIGHTS

The
Corporation has originated mortgage servicing rights which are included in
other assets on the consolidated balance sheets. Mortgage servicing rights are
amortized in proportion to, and over the period of, estimated net servicing
income on a basis similar to the interest method using an accelerated
amortization method and are subject to periodic impairment testing. Changes in
the carrying value of capitalized mortgage servicing rights are summarized as
follows:

|                                 |  |   |       |  
|-------------------------------- |  | - | ----- | -
|(in thousands)                   |  |   |       |  
|                                 |  |   |       |  
|Balance, January 1, 2009         |  | $ | 2,936 |  
|Servicing rights capitalized     |  |   | 719   |  
|Amortization of servicing rights |  |   | (376  | )
|Impairment of servicing rights   |  |   | (556  | )
|Balance, June 30, 2009           |  | $ | 2,723 |  

Activity
in the valuation allowance for mortgage servicing rights was as follows:

|                         |  |   |     | 
|------------------------ |  | - | --- | 
|(in thousands)           |  |   |     | 
|                         |  |   |     | 
|Balance, January 1, 2009 |  | $ |    | 
|Additions                |  |   | 556 | 
|Reductions               |  |   |    | 
|Direct write-downs       |  |   |    | 
|Balance, June 30, 2009   |  | $ | 556 | 

The
Corporation services loans for others with unpaid principal balances at June
30, 2009 and December 31, 2008 of approximately $341,947,000, and $304,551,000,
respectively.

11

---



The
following table shows the future estimated amortization expense for mortgage
servicing rights based on existing balances as of June 30, 2009. The
Corporations actual amortization expense in any given period may be
significantly different from the estimated amounts displayed depending on the
amount of additional mortgage servicing rights, changes in mortgage interest
rates, estimated prepayment speeds, and market conditions.

Estimated
Amortization Expense:

|                                            |  |                       |       | 
|------------------------------------------- |  | --------------------- | ----- | 
|                                            |  | Amount (in thousands) |      
|For the six
 months ended December 31, 2009 |  | $                     | 152   | 
|For the year
 ended December 31, 2010       |  |                       | 295   | 
|For the year
 ended December 31, 2011       |  |                       | 277   | 
|For the year
 ended December 31, 2012       |  |                       | 260   | 
|For the year
 ended December 31, 2013       |  |                       | 244   | 
|For the year
 ended December 31, 2014       |  |                       | 229   | 
|Thereafter                                  |  |                       | 1,266 | 

(5) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive loss components and the related tax benefit for the
six months ended June 30, 2009 and 2008 were as follows:

(in thousands)

|                                                                         |  |      |        |      |   |        |  
|------------------------------------------------------------------------ |  | ---- | ------ | ---- | - | ------ | -
|                                                                         |  | 2009 |        | 2008 |  
|                                                                        
|Net unrealized losses on securities available-for-sale                   |  | $    | (509   | )    | $ | (1,196 | )
|Less: Reclassification adjustment for realized gains included in
 income |  |      | (761   | )    |   | (276   | )
|                                                                         |  |      | (1,270 | )    |   | (1,472 | )
|Amortization of transition obligation of post retirement health care     |  |      | 0      |      |   | 8      |  
|                                                                         |  |      |        |      |   |        |  
|Other comprehensive loss, before tax effect                              |  |      | (1,270 | )    |   | (1,464 | )
|                                                                         |  |      |        |      |   |        |  
|Less: Tax benefit                                                        |  |      | 492    |      |   | 567    |  
|                                                                         |  |      |        |      |   |        |  
|Other comprehensive loss                                                 |  | $    | (778   | )    | $ | (897   | )

The
components of accumulated other comprehensive income (loss), included in
stockholders equity at June 30, 2009 and 2008 are as follows:

(in thousands)

|                                                               |  |      |       |      |   |      |  
|-------------------------------------------------------------- |  | ---- | ----- | ---- | - | ---- | -
|                                                               |  | 2009 |       | 2008 |  
|                                                              
|Net unrealized gains (losses) on securities available-for-sale |  | $    | 1,549 |      | $ | (351 | )
|Net unrealized benefit obligations                             |  |      | (530  | )    |   | (552 | )
|                                                               |  |      | 1,019 |      |   | (903 | )
|                                                               |  |      |       |      |   |      |  
|Less: Tax effect                                               |  |      | (395  | )    |   | 350  |  
|                                                               |  |      |       |      |   |      |  
|Net of-tax amount                                             |  | $    | 624   |      | $ | (553 | )

12

---



(6) FEDERAL HOME LOAN BANK STOCK

The
Corporation has Federal Home Loan Bank stock totaling $2,373,000 at June 30,
2009 and December 31, 2008. During the third quarter of 2007, the Federal Home
Loan Bank of Chicago received a Cease and Desist Order from their regulator,
the Federal Housing Finance Board. The Federal Home Loan Bank will continue to
provide liquidity and funding through advances, however, the order prohibits
capital stock repurchases and redemptions until a time to be determined by the
Federal Housing Finance Board and requires their approval for dividends. With
regard to dividends, the Federal Home Loan Bank will continue to assess its
dividend capacity each quarter and make appropriate request for approval. There
were no dividends paid by the Federal Home Loan Bank of Chicago during the
first six months of 2009 or during 2008. Management performed an analysis and
deemed the investment in Federal Home Loan Bank stock was not other than
temporarily impaired as of June 30, 2009 or December 31, 2008.

(7) INVESTMENT SECURITIES

The
amortized cost, gross unrealized gains, gross unrealized losses, and estimated
fair value of available-for-sale and held-to-maturity securities by major
security type at June 30, 2009 and December 31, 2008 were as follows:

(in thousands)

June 30, 2009

|                                     |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|------------------------------------ |  | --------------- | ------- | ------------------------ | - | ------------------------- |  | ---------------------- | ------ | - | - | ------- | 
|                                     |  | Amortized
 Cost |         | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Estimated
 Fair
 Value |       
|Available-for-sale:                  |  |                 |         |                          |   |                           |  |                        |       
|United States government
 agencies   |  | $               | 110,557 |                          | $ | 1,533                     |  | $                      | (420   | ) | $ | 111,670 | 
|State and municipal                  |  |                 | 115,509 |                          |   | 1,768                     |  |                        | (2,066 | ) |   | 115,211 | 
|Collateralized mortgage
 obligations |  |                 | 89,899  |                          |   | 1,004                     |  |                        | (270   | ) |   | 90,633  | 
|                                     |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|Total                                |  |                 | 315,965 |                          |   | 4,305                     |  |                        | (2,756 | ) |   | 317,514 | 
|Held-to-maturity:                    |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|State and municipal                  |  |                 | 15,186  |                          |   | 430                       |  |                        | (48    | ) |   | 15,568  | 
|                                     |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|Total                                |  | $               | 331,151 |                          | $ | 4,735                     |  | $                      | (2,804 | ) | $ | 333,082 | 

December 31, 2008

|                                    |  |                |         |                        |   |                         |  |                      |        |   |   |         | 
|----------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | -------------------- | ------ | - | - | ------- | 
|                                    |  | Amortized
Cost |         | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |  | Estimated
Fair
Value |       
|Available-for-sale:                 |  |                |         |                        |   |                         |  |                      |        |   |   |         | 
|United States government agencies   |  | $              | 89,883  |                        | $ | 2,344                   |  | $                    | (29    | ) | $ | 92,198  | 
|State and municipal                 |  |                | 89,776  |                        |   | 1,336                   |  |                      | (1,384 | ) |   | 89,728  | 
|Collateralized mortgage obligations |  |                | 54,405  |                        |   | 579                     |  |                      | (27    | ) |   | 54,957  | 
|                                    |  |                |         |                        |   |                         |  |                      |        |   |   |         | 
|Total                               |  |                | 234,064 |                        |   | 4,259                   |  |                      | (1,440 | ) |   | 236,883 | 
|Held-to-maturity:                   |  |                |         |                        |   |                         |  |                      |        |   |   |         | 
|State and municipal                 |  |                | 14,232  |                        |   | 294                     |  |                      | (65    | ) |   | 14,461  | 
|                                    |  |                |         |                        |   |                         |  |                      |        |   |   |         | 
|Total                               |  | $              | 248,296 |                        | $ | 4,553                   |  | $                    | (1,505 | ) | $ | 251,344 | 

13

---



Maturities
of investment securities classified as available-for-sale and held-to-maturity
were as follows at June 30, 2009:

(in thousands)

|                                        |  |                 |         |                        |   |         | 
|--------------------------------------- |  | --------------- | ------- | ---------------------- | - | ------- | 
|                                        |  | Amortized
 Cost |         | Estimated
 Fair
 Value |  
|Available-for-sale:                     |  |                 |         |                        |   |         | 
|Due in one year or less                 |  | $               | 1,924   |                        | $ | 1,933   | 
|Due after one year through
 five years  |  |                 | 13,025  |                        |   | 13,341  | 
|Due after five years through
 ten years |  |                 | 62,326  |                        |   | 62,590  | 
|Due after ten years                     |  |                 | 72,283  |                        |   | 71,387  | 
|                                        |  |                 | 149,558 |                        |   | 149,251 | 
|                                       
|Mortgage-backed securities              |  |                 | 76,508  |                        |   | 77,630  | 
|Collateralized mortgage
 obligations    |  |                 | 89,899  |                        |   | 90,633  | 
|                                        |  | $               | 315,965 |                        | $ | 317,514 | 
|Held-to-maturity:                       |  |                 |         |                        |   |         | 
|Due in one year or less                 |  | $               | 3,611   |                        | $ | 3,625   | 
|Due after one year through
 five years  |  |                 | 7,424   |                        |   | 7,711   | 
|Due after five years through
 ten years |  |                 | 3,681   |                        |   | 3,766   | 
|Due after ten years                     |  |                 | 470     |                        |   | 466     | 
|                                        |  | $               | 15,186  |                        | $ | 15,568  | 

Proceeds
from sales of investment securities available-for-sale during the first six
months of 2009 were $41,310. Gross gains of $879 and gross
losses of $118 were realized on those sales. There were no sales of investment
securities classified as held-to-maturity during the six months ended June 30,
2009.

14

---



Securities
with unrealized losses at June 30, 2009 and December 31, 2008 not recognized in
income are as follows:

(in thousands)

|                                    |  |                      |         |                         |   |             |   |                         |     |             |   |                         |  |   |         |  |   |        |  
|----------------------------------- |  | -------------------- | ------- | ----------------------- | - | ----------- | - | ----------------------- | --- | ----------- | - | ----------------------- |  | - | ------- |  | - | ------ | -
|2009                                |  | Less than
 12 Months |         | 12 Months
 or More      |   | Total       |  
|                                    |  | Fair
 Value          |         | Gross
 Unrealized
 Loss |   | Fair
 Value |   | Gross
 Unrealized
 Loss |     | Fair
 Value |   | Gross
 Unrealized
 Loss | 
|United States Government Agencies   |  | $                    | 37,884  |                         | $ | (420        | ) | $                       | -0- |             | $ | -0-                     |  | $ | 37,884  |  | $ | (420   | )
|State and Municipal                 |  |                      | 61,635  |                         |   | (2,114      | ) |                         | -0- |             |   | -0-                     |  |   | 61,635  |  |   | (2,114 | )
|Collateralized mortgage obligations |  |                      | 26,327  |                         |   | (270        | ) |                         | -0- |             |   | -0-                     |  |   | 26,327  |  |   | (270   | )
|                                    |  |                      |         |                         |   |             |   |                         |     |             |   |                         |  |   |         |  |   |        |  
|Total temporarily impaired          |  | $                    | 125,846 |                         | $ | (2,804      | ) | $                       | -0- |             | $ | -0-                     |  | $ | 125,846 |  | $ | (2,804 | )

|                                    |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|----------------------------------- |  | ------------------- | ------ | ----------------------- | - | ----------- | - | ----------------------- | ------ | ----------- | - | ----------------------- | - | - | ------ |  | - | ------ | -
|2008                                |  | Less than 12 Months |        | 12 Months or More       |   | Total       |  
|                                    |  | Fair
 Value         |        | Gross
 Unrealized
 Loss |   | Fair
 Value |   | Gross
 Unrealized
 Loss |        | Fair
 Value |   | Gross
 Unrealized
 Loss |  
|United States Government Agencies   |  | $                   | 1,569  |                         | $ | (19         | ) | $                       | 461    |             | $ | (10                     | ) | $ | 2,030  |  | $ | (29    | )
|State and Municipal                 |  |                     | 17,913 |                         |   | (679        | ) |                         | 22,082 |             |   | (770                    | ) |   | 39,995 |  |   | (1,449 | )
|Collateralized mortgage obligations |  |                     | 3,310  |                         |   | (12         | ) |                         | 3,308  |             |   | (15                     | ) |   | 6,618  |  |   | (27    | )
|                                    |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|Total temporarily impaired          |  | $                   | 22,792 |                         | $ | (710        | ) | $                       | 25,851 |             | $ | (795                    | ) | $ | 48,643 |  | $ | (1,505 | )

There
are 215 securities in an unrealized loss position in the investment portfolio
at June 30, 2009, all due to interest rate changes and not credit events. These
unrealized losses are considered temporary and, therefore, have not been
recognized into income, because the issuers are of high credit quality and
management has the ability and intent to hold for the foreseeable future. The
fair value is expected to recover as the investments approach their maturity
date or there is a downward shift in interest rates.

The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes was $276,786 at June 30, 2009 and $234,525 at December
31, 2008.

(8) FAIR VALUE OF ASSETS AND LIABILITIES

Effective
January 1, 2008, the Corporation adopted Statement of Financial Accounting
Standards No. 157 (FAS 157), Fair Value Measurements. FAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. FAS 157 has been applied prospectively as of the
beginning of the period.

FAS 157
defines the fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. FAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.

15

---



In
accordance with FAS 157, the Corporation groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. These levels are:

| |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1 | Valuations for assets and liabilities traded in active exchange
 markets, such as the New York Stock Exchange. Valuations are obtained from
 readily available pricing sources for market transactions involving identical
 assets or liabilities.                                                                                                                                                                                                                                                                       
| |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Level 2 | Valuations for assets and liabilities traded in less active dealer or
 broker markets. Valuations are obtained from third party pricing services for
 identical or comparable assets or liabilities which use observable inputs
 other than Level 1 prices, such as quoted prices for similar assets or
 liabilities; quoted prices in markets that are not active; or other inputs
 that are observable or can be corroborated by observable market data for
 substantially the full term of the assets and liabilities.
| |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Level 3 | Unobservable inputs that are supported by little or no market
 activity and that are significant to the fair value of the assets or
 liabilities.                                                                                                                                                                                                                                                                                                                                                                        

Following
is a description of the valuation methodologies used for instruments measured
at fair value on a recurring basis and recognized in the accompanying balance
sheet.

Available-for-Sale
Securities

The fair
value of available-for-sale securities are determined by various valuation
methodologies. Where quoted market prices are available in an active market,
securities are classified within Level 1. The Corporation has no securities
classified within Level 1. If quoted market prices are not available, then fair
values are estimated by using pricing models or quoted prices of securities
with similar characteristics. Level 2 securities include U.S. Treasury
securities, Obligations of U.S. government corporations and agencies, Obligations
of states and political subdivisions, mortgage-backed securities and
collateralized mortgage obligations. In certain cases where Level 1 or Level 2
inputs are not available, securities are classified within Level 3 of the
hierarchy. The Corporation has no securities classified within Level 3.

The
following table presents the Corporations assets that are measured at fair
value on a recurring basis and the level within the FAS 157 hierarchy in which
the fair value measurements fall as of June 30, 2009 and December 31, 2008 (in
thousands):

June 30, 2009

|                              |  |            |         |                                                                    |                                |                                                  |  |                                              |         |  |   |   | 
|----------------------------- |  | ---------- | ------- | ------------------------------------------------------------------ | ------------------------------ | ------------------------------------------------ |  | -------------------------------------------- | ------- |  | - | - | 
|                              |  |            |         |                                                                    | Fair Value
 Measurements Using |                                                 
|                              |  | Fair Value |         | Quoted
 Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                | Significant
 Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |        
|                             
|Available-for-sale securities |  | $          | 317,514 |                                                                    | $                              | 0                                                |  | $                                            | 317,514 |  | $ | 0 | 

16

---



December 31, 2008

|                              |  |            |         |                                                                    |                                |                                                  |  |                                              |         |  |   |   | 
|----------------------------- |  | ---------- | ------- | ------------------------------------------------------------------ | ------------------------------ | ------------------------------------------------ |  | -------------------------------------------- | ------- |  | - | - | 
|                              |  |            |         |                                                                    | Fair Value
 Measurements Using |                                                 
|                              |  | Fair Value |         | Quoted
 Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                | Significant
 Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |        
|                             
|Available-for-sale securities |  | $          | 236,883 |                                                                    | $                              | 0                                                |  | $                                            | 236,883 |  | $ | 0 | 

Following
is a description of the valuation methodologies used for assets and liabilities
measured at fair value on a non-recurring basis and recognized in the
accompanying balance sheets, as well as the general classification of such
assets and liabilities pursuant to the valuation hierarchy.

Impaired Loans

Loans for
which it is probable that the Corporation will not collect all principal and
interest due according to contractual terms are measured for impairment in
accordance with the provisions of Financial Accounting Standard No. 114 (FAS
114), Accounting by Creditors for Impairment of a Loan. Allowable methods for estimating fair value
include using the fair value of the collateral for collateral dependent loans
or, where a loan is determined not to be collateral dependent, using the
discounted cash flow method.

If the
impaired loan is identified as collateral dependent, then the fair value method
of measuring the amount of impairment is utilized. This method requires
obtaining a current independent appraisal of the collateral and applying a
discount factor to the value. If the impaired loan is determined not to be
collateral dependent, then the discounted cash flow method is used. This method
requires the impaired loan to be recorded at the present value of expected
future cash flows discounted at the loans effective interest rate. The
effective interest rate of a loan is the contractual interest rate adjusted for
any net deferred loan fees or costs, premiums or discount existing at
origination or acquisition of the loan. Impaired loans are classified within Level
3 of the fair value hierarchy.

Mortgage Servicing Rights

The fair
value used to determine the valuation allowance is estimated using discounted
cash flow models. Due to the nature of the valuation inputs, mortgage servicing
rights are classified within Level 3 of the hierarchy.

Other Real Estate
Owned

Other
real estate owned acquired through loan foreclosure is initially recorded at
fair value less costs to sell when acquired, establishing a new cost basis. The
adjustment at the time of foreclosure is recorded through the allowance for
loan losses. Due to the subjective nature of establishing the fair value when
the asset is acquired, the actual fair value of the other real estate owned or
foreclosed asset could differ from the original estimate. If it is determined
the fair value declines subsequent to foreclosure, a valuation allowance is
recorded through non-interest expense. Operating costs associated with the
assets after acquisition are also recorded as non-interest expense. Gains and
losses on the disposition of other real estate owned and foreclosed assets are
netted and posted to other non-interest expense. Other real estate owned
measured at fair value on a non-recurring basis at June 30, 2009 amounted to
$13.9 million.

17

---



The
following table presents the fair value measurement of assets and liabilities
measured at fair value on a nonrecurring basis and the level within the FAS 157
fair value hierarchy in which the fair value measurements fall at June 30, 2009
and December 31, 2008.

June 30, 2009

|                          |  |            |        |                                                                   |                               |                                                 |   |                                              |   |        |  |  | 
|------------------------- |  | ---------- | ------ | ----------------------------------------------------------------- | ----------------------------- | ----------------------------------------------- | - | -------------------------------------------- | - | ------ |  |  | 
|                          |  |            |        |                                                                   | Fair Value Measurements Using |                                                
|                          |  | Fair Value |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |   | Significant
 Unobservable
 Inputs
 (Level 3) |  
|                         
|Impaired loans            |  | $          | 3,584  |                                                                   | 0                             |                                                 | 0 |                                              | $ | 3,584  | 
|Mortgage servicing rights |  |            | 2,723  |                                                                   | 0                             |                                                 | 0 |                                              |   | 2,723  | 
|Other real estate owned   |  |            | 13,933 |                                                                   | 0                             |                                                 | 0 |                                              |   | 13,933 | 

December 31, 2008

|               |  |            |       |                                                                   |                               |                                                 |   |                                              |   |       |  |  | 
|-------------- |  | ---------- | ----- | ----------------------------------------------------------------- | ----------------------------- | ----------------------------------------------- | - | -------------------------------------------- | - | ----- |  |  | 
|               |  |            |       |                                                                   | Fair Value Measurements Using |                                                
|               |  | Fair Value |       | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |   | Significant
 Unobservable
 Inputs
 (Level 3) |  
|              
|Impaired loans |  | $          | 2,494 |                                                                   | 0                             |                                                 | 0 |                                              | $ | 2,494 | 

Statement
of Financial Accounting Standards No. 107 (FAS 107), Disclosures about Fair
Value of Financial Instruments, requires all entities to disclose the
estimated fair value of their financial instrument assets and liabilities. For
the Corporation, as for most financial institutions, the majority of its assets
and liabilities are considered financial instruments as defined in FAS 107.
Many of the Corporations financial instruments, however, lack an available
trading market as characterized by a willing buyer and willing seller engaging
in an exchange transaction. It is also the Corporations general practice and
intent to hold its financial instruments to maturity and to not engage in
trading or sales activities except for loans held-for-sale and
available-for-sale securities. Therefore, significant estimations and
assumptions, as well as present value calculations, were used by the
Corporation for the purposes of this disclosure.

Estimated
fair values have been determined by the Corporation using the best available
data and an estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest rates, it is
presumed that estimated fair values generally approximate the recorded book
balances. The estimation methodologies used, the estimated fair values, and the
recorded book balances at June 30, 2009 and December 31, 2008, were as follows:

18

---



|                                                             |  |                 |           |                   |   |                 |  |             |           |  |   |           | 
|------------------------------------------------------------ |  | --------------- | --------- | ----------------- | - | --------------- |  | ----------- | --------- |  | - | --------- | 
|(in thousands)                                               |  |                 |           |                   |   |                 |  |             |           |  |   |           | 
|                                                            
|                                                             |  | June 30, 2009   |           | December 31, 2008 |  
|                                                             |  | Carrying
 Value |           | Fair
 Value       |   | Carrying
 Value |  | Fair
 Value |          
|Financial Assets:                                            |  |                 |           |                   |   |                 |  |             |           |  |   |           | 
|                                                             |  |                 |           |                   |   |                 |  |             |           |  |   |           | 
|Cash
 and due from banks                                     |  | $               | 12,741    |                   | $ | 12,741          |  | $           | 20,163    |  | $ | 20,163    | 
|Interest-bearing
 deposits in financial institutions         |  |                 | 35,929    |                   |   | 35,929          |  |             | 98        |  |   | 98        | 
|Investment
 securities                                       |  |                 | 332,700   |                   |   | 333,082         |  |             | 251,115   |  |   | 251,344   | 
|Loans,
 net, including loans held for sale                   |  |                 | 762,360   |                   |   | 767,363         |  |             | 787,928   |  |   | 793,411   | 
|Accrued
 interest receivable                                 |  |                 | 7,840     |                   |   | 7,840           |  |             | 9,693     |  |   | 9,693     | 
|Total Financial Assets                                       |  | $               | 1,151,550 |                   | $ | 1,156,935       |  | $           | 1,068,997 |  | $ | 1,074,709 | 
|Financial Liabilities:                                       |  |                 |           |                   |   |                 |  |             |           |  |   |           | 
|                                                             |  |                 |           |                   |   |                 |  |             |           |  |   |           | 
|Non-interest
 bearing demand deposits                        |  | $               | 108,952   |                   | $ | 108,952         |  | $           | 110,559   |  | $ | 110,559   | 
|Interest-bearing
 deposits                                   |  |                 | 946,705   |                   |   | 956,207         |  |             | 851,573   |  |   | 862,165   | 
|Borrowings                                                   |  |                 | 94,633    |                   |   | 108,287         |  |             | 118,016   |  |   | 127,816   | 
|Accrued
 interest payable                                    |  |                 | 4,525     |                   |   | 4,525           |  |             | 4,472     |  |   | 4,472     | 
|Total
 Financial Liabilities                                 |  | $               | 1,154,815 |                   | $ | 1,177,971       |  | $           | 1,084,620 |  | $ | 1,105,012 | 
|                                                             |  |                 |           |                   |   |                 |  |             |           |  |   |           | 
|Unrecognized
 financial instruments (net of contract amount) |  |                 |           |                   |   |                 |  |             |           |  |   |           | 
|                                                             |  |                 |           |                   |   |                 |  |             |           |  |   |           | 
|Commitments
 to originate loans                              |  | $               | -0-       |                   | $ | -0-             |  | $           | -0-       |  | $ | -0-       | 
|Lines
 of credit                                             |  |                 | -0-       |                   |   | -0-             |  |             | -0-       |  |   | -0-       | 

Financial
instruments actively traded in a secondary market have been valued using quoted
available market prices. Cash and due from banks, interest-bearing time
deposits in other banks, federal funds sold, loans held-for-sale and interest
receivable are valued at book value, which approximates fair value.

Financial
liability instruments with stated maturities have been valued using a present
value discounted cash flow analysis with a discount rate approximating current
market for similar liabilities. Interest payable is valued at book value, which
approximates fair value.

Financial instrument liabilities with no stated maturities have an
estimated fair value equal to both the amount payable on demand and the
recorded book balance.

The net loan portfolio has been valued using a present value discounted
cash flow. The discount rate used in these calculations is the current rate at
which similar loans would be made to borrowers with similar credit ratings, same remaining maturities, and assumed
prepayment risk.

19

---



The fair
value of commitments to originate loans is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
values of letters of credit and lines of credit are based on fees currently
charged for similar agreements or on the estimated cost to terminate or
otherwise settle the obligations with the counterparties at the reporting date.

Changes in
assumptions or estimation methodologies may have a material effect on these
estimated fair values.

The
Corporations remaining assets and liabilities, which are not considered
financial instruments, have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Corporations core deposit base is required by FAS 107.

Fair value
estimates are based on existing balance sheet financial instruments, without
attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments. For
example, the subsidiary bank has a large fiduciary services department that
contributes net fee income annually. The fiduciary services department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage banking
operation, brokerage network, deferred taxes, premises and equipment, and goodwill.
In addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.

Management
believes that reasonable comparability between financial institutions may not
be likely, due to the wide range of permitted valuation techniques and numerous
estimates which must be made, given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
also introduces a greater degree of subjectivity to these estimated fair
values.

(9) INCOME TAXES

A
reconciliation of income tax expense at 34 percent of pre-tax income to the
Corporations actual tax expense (benefit) for the three and six-month periods
ended June 30 is shown below:

|                                                     |  |                              |      |                            |   |      |   |      |       |   |   |       |  
|---------------------------------------------------- |  | ---------------------------- | ---- | -------------------------- | - | ---- | - | ---- | ----- | - | - | ----- | -
|                                                     |  | Three Months Ended
 June 30, |      | Six Months Ended
 June 30, |  
|                                                     |  | 2009                         |      | 2008                       |   | 2009 |   | 2008 |      
|Computed expected tax
 expense                     |  | $                            | 741  |                            | $ | 887  |   | $    | 1,099 |   | $ | 1,798 |  
|                                                     |  |                              |      |                            |   |      |   |      |       |   |   |       |  
|Increase (decrease) in
 income taxes resulting from: |  |                              |      |                            |   |      |   |      |       |   |   |       |  
|Tax-exempt income                                    |  |                              | (435 | )                          |   | (314 | ) |      | (814  | ) |   | (652  | )
|State income taxes, net of federal tax
benefit       |  |                              | 116  |                            |   | 171  |   |      | 157   |   |   | 351   |  
|Bank-owned life insurance income                     |  |                              | (79  | )                          |   | (68  | ) |      | (165  | ) |   | (144  | )
|Other, net                                           |  |                              | (61  | )                          |   | (87  | ) |      | (99   | ) |   | (176  | )
|                                                     |  | $                            | 282  |                            | $ | 589  |   | $    | 178   |   | $ | 1,177 |  

20

---



(10) IMPACT OF NEW ACCOUNTING STANDARDS

In
December 2007, the FASB issued SFAS No. 141R (FAS 141R), Business
Combinations, which revises FAS 141 and changes multiple aspects of the
accounting for business combinations. Under the guidance in FAS 141R, the
acquisition method must be used, which requires the acquirer to recognize most
identifiable assets acquired, liabilities assumed, and non-controlling
interests in the acquiree at their full fair value on the acquisition date.
Goodwill is to be recognized as the excess of the consideration transferred
plus the fair value of the non-controlling interest over the fair values of the
identifiable net assets acquired. Subsequent changes in the fair value of
contingent consideration classified as a liability are to be recognized in
earnings, while contingent consideration classified as equity is not to be re-measured.
Costs such as transaction costs are to be excluded from acquisition accounting,
generally leading to recognizing expense and additionally, restructuring costs
that do not meet certain criteria at acquisition date are to be subsequently
recognized as post-acquisition costs. FAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
implementation of FAS 141R did not have a material impact on the Corporations
financial position or results of operations.

In
December 2007, the FASB issued Statement of Financial Accounting No. 160 (FAS
160), Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51. The
Statement requires that a noncontrolling interest in a subsidiary be reported
separately within equity and the amount of consolidated net income specifically
attributable to the noncontrolling interest be identified in the consolidated
financial statements. It also calls for consistency in the manner of reporting
changes in the parents ownership interest and requires fair value measurement
of any noncontrolling equity investment retained in deconsolidation. FAS 160
became effective for fiscal years beginning after December 15, 2008. The
application of FAS 160 did not have a material impact on the Corporations
consolidated financial statements.

In
March 2008, the FASB issued SFAS No. 161 (FAS 161), Disclosures About Derivative
Instruments and Hedging Activities  an amendment of FAS 133. FAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. FAS 161 is effective for fiscal years
beginning after November 15, 2008. The implementation of FAS 161 did not have a
material impact on its consolidated financial statements.

In
May 2008, the FASB issued Statement of Financial Accounting No. 162 (FAS
162), The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement became effective on
November 15, 2008. The application of FAS 162 did not have a material impact on
the Corporations consolidated financial statements.

In
January 2009, the FASB issued FSP E 99-20-1, Amendments to the Impairment and
Interest Income Measurement Guidance of EITF Issue No. 99-20. FSP EITF 99-20-I
amends the impairment guidance in EITF Issue No. 99-20 in order to achieve more
consistent determination of whether an other-than- temporary impairment (OTTI)
has occurred. Prior to the FSP, the impairment model in EITF 99-20 was
different from FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities.
This FSP amended EITF 99-20 to more closely align the OTTI guidance therein to
the guidance in Statement No. 115. Retrospective application to a prior interim
or annual period is prohibited. The Corporation does not expect the
implementation of this FSP to have a material impact on its consolidated
financial statements.

21

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In April
2009, the FASB issued three amendments to the fair value measurement,
disclosure and other-than-temporary impairment standards:

| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | FAS 157-4, Determining Fair Value When the Volume and Level of
 Activity for the Asset or Liability Have Significantly Decreased and Identifying
 Transactions that are Not Orderly.
| |   |                                                                                                                                                                                       
| |  | FAS 115-2
 and FAS 124-2, Recognition and
 Presentation of Other-Than-Temporary Impairments.                                                                                        
| |   |                                                                                                                                                                                       
| |  | FAS 107 and
 APB 28-1, Interim Disclosures about Fair
 Value of Financial Instruments.                                                                                              

FASB
Statement of Financial Accounting No. 157 (FAS 157), Fair value Measurements, defines fair
value as the price that would be received to sell the asset or transfer the
liability in an orderly transaction (that is, not a forced liquidation or
distressed sale) between market participants at the measurement date under
current market conditions. FAS 157-4 provided additional guidance on
identifying circumstances when a transaction may not be considered orderly.

FAS 157-4
provides a list of factors that a reporting entity should evaluate to determine
whether there has been a significant decrease in the volume and level of
activity for the asset or liability in relation to normal market activity for
the asset or liability. When the reporting entity concludes there has been a
significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value in accordance with FAS 157.

FAS 157-4
clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly. In those situations, the entity must evaluate the weight of evidence
to determine whether the transaction is orderly. It also provides a list of
circumstances that may indicate that a transaction is not orderly. A
transaction price that is not associated with an orderly transaction is given little,
if any, weight when estimating fair value.

FAS 115-2
and FAS 124-2 clarifies the interaction of the factors that should be
considered when determining whether a debt security is otherthan-temporarily
impaired. For debt securities, management must assess whether (a) it has the
intent to sell the security and (b) it is more likely than not that it will be
required to sell the security prior to its anticipated recovery. These steps
are done before assessing whether the entity will recover the cost basis of the
investment. Previously, this assessment required management to assert it has
both the intent and the ability to hold a security for a period of time
sufficient to allow for anticipated recovery in fair value to avoid recognizing
an other-than-temporary impairment. This change does not affect the need to
forecast recovery of the value of the security through either cash flows or
market price.

22

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In
instances when a determination is made that an other-than-temporary impairment
exists but the investor does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FAS 115-2 and
FAS 124-2 change the presentation and amount of the other-than-temporary
impairment recognized in the income statement. The other-than-temporary
impairment is separated into (a) the amount of the total other-than-temporary
impairment related to a decrease in cash flows expected to be collected from
the debt security (the credit loss) and (b) the amount of the total
other-than-temporary impairment related to all other factors. The amount of the
total other-than-temporary impairment related to the credit loss is recognized
in earnings. The amount of the total other-than-temporary impairment related to
all other factors is recognized in other comprehensive income.

FAS 107-1
and APB 28-1 amends FASB Statement No. 107 (FAS 107), Disclosures about Fair Value of Financial
Instruments,to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. FAS 107-1 also amends APB Opinion No. 28, Interim Financial Reporting, to
require
those disclosures in summarized financial information at interim reporting
periods.

All three
FASB Staff Positions discussed herein include substantial additional disclosure
requirements. The effective date for these new standards is the same: interim
and annual reporting periods ending after June 15, 2009. The Corporation
adopted these standards at June 30, 2009 and there was not a material impact on
its consolidated financial statements.

On
May 28, 2009, the FASB issued SFAS No. 165, Subsequent
Events (FAS 165). Under FAS 165, companies are required to
evaluate events and transactions that occur after the balance sheet date but
before the date the financial statements are issued, or available to be issued
in the case of non-public entities. FAS 165 requires entities to recognize in
the financial statements the effect of all events or transactions that provide
additional evidence of conditions that existed at the balance sheet date,
including the estimates inherent in the financial preparation process. Entities
shall not recognize the impact of events or transactions that provide evidence
about conditions that did not exist at the balance sheet date but arose after
that date. FAS 165 also requires entities to disclose the date through which
subsequent events have been evaluated. FAS 165 was effective for interim and
annual reporting periods ending after June 15, 2009. The Corporation adopted
the provisions of FAS 165 for the quarter ended June 30, 2009, as required, and
adoption did not have a material impact on the Corporations financial
statements taken as a whole.

On
June 12, 2009, the FASB issued SFAS No. 166, Accounting
for Transfers of Financial Assets (FAS 166), and SFAS No.167,Amendments to FASB Interpretation No. 46(R)(FAS
167), which change the way entities account for securitizations and
special-purpose entities.

FAS
166 is a revision to FAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
and will require more information about transfers of financial assets,
including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. FAS 166 also
eliminates the concept of a qualifying special-purpose entity, changes the
requirements for derecognizing financial assets and requires additional
disclosures.

FAS
167 is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how
a company determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated. The
determination of whether a company is required to consolidate an entity is
based on, among other things, an entitys purpose and design and a companys
ability to direct the activities of the entity that most significantly impact
the entitys economic performance.

23

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Both
FAS 166 and FAS 167 will be effective as of the beginning of each reporting
entitys first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. Earlier application is prohibited. The
recognition and measurement provisions of FAS 166 shall be applied to transfers
that occur on or after the effective date. The Corporation will adopt both FAS
166 and FAS 167 on January 1, 2010, as required. Management has not determined
the impact adoption may have on the Corporations consolidated financial
statements.

On
June 29, 2009, the FASB issued Statement of Financial Accounting Standards No.
168 (FAS 168) Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting
Principles  a replacement of FASB Statement No. 162. FAS 168
establishes the FASB Accounting Standards
CodificationTM as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with US GAAP. FAS 168
will be effective for financial statements issued for interim and annual
periods ending after September 15, 2009, for most entities. On the effective
date, all non-SEC accounting and reporting standards will be superceded. The
Corporation will adopt FAS 168 for the quarterly period ended September 30,
2009, as required, and adoption is not expected to have a material impact on
the Corporations financial statements taken as a whole.

(11) SUBSEQUENT EVENTS

Subsequent
events have been evaluated through July 27, 2009, which is the date the
financial statements were issued.

24

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Schedule 6

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three and six-month periods ended June 30, 2009 and 2008

The
following discussion provides information about Princeton National Bancorp,
Inc.s (PNBC or the Corporation) financial condition and results of
operations for the three and six-month periods ended June 30, 2009 and 2008.
This discussion should be read in conjunction with the attached consolidated
financial statements and notes thereto. This report contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended (the Exchange Act), such as discussions of the Corporations
pricing and fee trends, credit quality and outlook, liquidity, new business
results, expansion plans, anticipated expenses and planned schedules. The
Corporation intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Corporation, are identified by use of the words believe,
expect, intend, anticipate, estimate, project, or similar
expressions. Actual results could differ materially from the results indicated
by these statements because the realization of those results is subject to many
risks and uncertainties including: the effect of the current severe disruption
in financial markets and the United States government programs introduced to
restore stability and liquidity, changes in interest rates, general economic
conditions and the weakening state of the United States economy,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporations market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including a discussion of these and additional factors that could materially
affect the Corporations financial results, is included in the Corporations
2008 Annual Report on Form 10-K under the headings Item 1. Business and Item
1A. Risk Factors.

CRITICAL ACCOUNTING POLICIES AND USE OF SIGNIFICANT
ESTIMATES

The
Corporation has established various accounting policies that govern the
application of U.S. generally accepted accounting principles in the preparation
of the Corporations financial statements. The significant accounting policies
of the Corporation are described in the footnotes to the consolidated financial
statements. Certain accounting policies involve significant judgments and
assumptions by management that have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies
to be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and assumptions, which could
have a material impact on the carrying values of assets and liabilities and the
results of operations of the Corporation.

25

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Allowance for Loan Losses

The
Corporation believes the allowance for loan losses is the critical accounting
policy that requires the most significant judgments and assumptions used in the
preparation of its consolidated financial statements. We determine probable
incurred losses inherent in our loan portfolio and establish an allowance for
those losses by considering factors including historical loss rates, expected
cash flows and estimated collateral values. In assessing these factors, we use
organizational history and experience with credit decisions and related
outcomes. The allowance for loan losses represents our best estimate of losses
inherent in the existing loan portfolio. The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by
loans charged off, net of recoveries. We evaluate our allowance for loan losses
quarterly. If our underlying assumptions later prove to be inaccurate based on
subsequent loss evaluations, the allowance for loan losses is adjusted.

We
estimate the appropriate level of allowance for loan losses by separately
evaluating impaired and non-impaired loans. A specific allowance is assigned to
an impaired loan when expected cash flows or collateral do not justify the
carrying amount of the loan. The methodology used to assign an allowance to a
non-impaired loan is more subjective. Generally, the allowance assigned to
non-impaired loans is determined by applying historical loss rates to existing
loans with similar risk characteristics, adjusted for qualitative factors
including the volume and severity of identified classified loans, changes in
economic conditions, changes in credit policies or underwriting standards, and
changes in the level of credit risk associated with specific industries and
markets. Because the economic and business climate in any given industry or
market, and its impact on any given borrower, can change rapidly, the risk
profile of the loan portfolio is continually assessed and adjusted when
appropriate. Notwithstanding these procedures, there still exists the
possibility that our assessment could prove to be significantly incorrect and
that an immediate adjustment to the allowance for loan losses would be required.

Other Real Estate Owned

Other
real estate owned acquired through loan foreclosure is initially recorded at
fair value less costs to sell when acquired, establishing a new cost basis. The
adjustment at the time of foreclosure is recorded through the allowance for
loan losses. Due to the subjective nature of establishing the fair value when
the asset is acquired, the actual fair value of the other real estate owned or
foreclosed asset could differ from the original estimate. If it is determined
that fair value declines subsequent to foreclosure, a valuation allowance is
recorded through non-interest expense. Operating costs associated with the
assets after acquisition are also recorded as non-interest expense. Gains and
losses on the disposition of other real estate owned and foreclosed assets are
netted and posted to other non-interest expense.

Deferred Income Tax Assets/Liabilities

Our
net deferred income tax asset arises from differences in the dates that items
of income and expense enter into our reported income and taxable income.
Deferred tax assets and liabilities are established for these items as they
arise. From an accounting standpoint, deferred tax assets are reviewed to
determine if they are realizable based on the historical level of our taxable
income, estimates of our future taxable income and the reversals of deferred
tax liabilities. In most cases, the realization of the deferred tax asset is
based on our future profitability. If we were to experience net operating losses
for tax purposes in a future period, the realization of our deferred tax assets
would be evaluated for a potential valuation reserve.

26

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Additionally,
the Corporation reviews its uncertain tax positions annually under FASB
Interpretation 48, Accounting for Uncertainty in Income Taxes. An uncertain tax
position is recognized as a benefit only if it is more likely than not that
the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount actually recognized is the
largest amount of tax benefit that is greater than 50% likely to be recognized
on examination. For tax positions not meeting the more likely than not test,
no tax benefit is recorded. A significant amount of judgment is applied to
determine both whether the tax position meets the more likely than not test
as well as to determine the largest amount of tax benefit that is greater than
50% likely to be recognized. Differences between the position taken by
management and that of taxing authorities could result in a reduction of a tax
benefit or increase to tax liability, which could adversely affect future
income tax expense.

Impairment of Goodwill and Intangible Assets

Core
deposit and customer relationships, which are intangible assets with a finite
life, are recorded on our balance sheets. These intangible assets were
capitalized as a result of past acquisitions and are being amortized over their
estimated useful lives of up to 15 years. Core deposit intangible assets, with
finite lives will be tested for impairment when changes in events or
circumstances indicate that its carrying amount may not be recoverable. Core
deposit intangible assets were tested for impairment during 2008 and 2007, as
part of the goodwill impairment test and no impairment was deemed necessary.

As
a result of our acquisition activity, goodwill, an intangible asset with an
indefinite life, was reflected on our balance sheet in prior periods. Goodwill
is evaluated for impairment annually, unless there are factors present that
indicate a potential impairment, in which case, the goodwill impairment test is
performed more frequently than annually. Accordingly, as the Corporations
stock price at March 31, 2009 decreased below book value, a goodwill impairment
test was performed and no impairment was deemed necessary (see Note 3 
Goodwill and Intangible Assets in the Notes to Consolidated Financial
Statements). In the three-month period since the impairment test, the
Corporations earnings and stock price have improved. Therefore, there were no
impairment indicators which warranted a third party study of goodwill
impairment during the second quarter. Accordingly, there was no impairment
deemed necessary as of June 30, 2009.

Mortgaging Service Rights (MSRs)

MSR
fair values are very sensitive to movements in interest rates as expected
future net servicing income depends on the projected outstanding principal
balances of the underlying loans, which can be greatly reduced by prepayments.
Prepayments usually increase when mortgage interest rates decline and decrease
when mortgage interest rates rise. For discussion regarding the impairment of
MSRs, see Note 4  Originated Mortgage Servicing Rights in the Notes to
Consolidated Financial Statements.

Fair Value Measurements

The
fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. The Corporation estimates the fair
value of a financial instrument using a variety of valuation methods. Where
financial instruments are actively traded and have quoted market prices, quoted
market prices are used for fair value. When the financial instruments are not
actively traded, other observable market inputs, such as quoted prices of
securities with similar characteristics, may be used, if available, to
determine fair value. When observable market prices do not exist, the
Corporation estimates fair value. The Corporations valuation methods consider
factors such as liquidity and concentration concerns. Other factors such as
model assumptions, market dislocations and unexpected correlations can affect
estimates of fair value. Imprecision in
estimating these factors can impact the amount of revenue or loss recorded.

27

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FASB
Statement No. 157, Fair Value Measurements, establishes a framework for
measuring the fair value of financial instrument that considers the attributes
specific to particular assets or liabilities and establishes a three-level
hierarchy for determining fair value based on the transparency of inputs to
each valuation as of the fair value measurement date. The three levels are
defined as follows:

| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1 -
 quoted prices (unadjusted) for identical assets or liabilities in active
 markets.                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                     
| | Level 2 -
 inputs include quoted prices for similar assets and liabilities in active
 markets, quoted prices of identical or similar assets or liabilities in
 markets that are not active, and inputs that are observable for the asset or
 liability, either directly or indirectly, for substantially the full term of
 the financial instrument.
| |                                                                                                                                                                                                                                                                                                                                                     
| | Level 3 -
 inputs that are unobservable and significant to the fair value measurement.                                                                                                                                                                                                                                                              

At
the end of each quarter, the Corporation assesses the valuation hierarchy for
each asset or liability measured. From time to time, assets or liabilities may
be transferred within hierarchy levels due to changes in availability of
observable market inputs to measure fair value at the measurement date.
Transfers into or out of hierarchy levels are based upon the fair value at the
beginning of the reporting period. A more detailed description of the fair
values measured at each level of the fair value hierarchy can be found in Note
8- Fair Value of Assets and Liabilities in the Notes to Consolidated
Financial Statements.

RESULTS OF OPERATIONS

Net income
for the second quarter of 2009 was $1,898,000, or basic and diluted earnings
per common share of $0.48, as compared to net income of $2,020,000 in the
second quarter of 2008, or basic and diluted earnings per common share of
$0.61. This represents a decrease of $122,000 (or 6.0%), and $0.13 per basic
and diluted common share. The lower net income figure is attributable to an
increase in the provision for loan losses and insurance assessments by the
FDIC, despite a 16% improvement in net interest income, discussed below.
However, the second quarter 2009 results improved 64.2% when compared to the
first quarter 2009 results of $1,156,000, or basic and diluted earnings per
common share of $0.28. Net income for the first six months of 2009 was
$3,055,000 or basic and diluted earnings per common share of $0.75, compared to
net income of $4,111,000, or basic earnings per common share of $1.25 (diluted
earnings per common share of $1.24) for the first six months of 2008. This
represents a decrease of $1,056,000, (25.7%) or $0.50 per basic common share
and $0.49 per diluted common share. The lower net income figure is primarily
attributed to an increase in the provision for loan losses of $1.8 million and
an increase in the amount of federal insurance assessments of $1.4 million. The
annualized return on average assets and return on average equity were 0.61% and
7.77%, respectively, for the second quarter of 2009, compared with 0.75% and
11.71% for the second quarter of 2008. For the six-month periods, the
annualized return on average assets and return on average equity were 0.51% and
6.51%, respectively for 2009, compared with 0.76% and 11.98%, respectively for
2008.

Net
interest income before the provision for loan losses was $8,629,000 for the
second quarter of 2009, compared to $7,817,000 for the second quarter of 2008
(an increase of $812,000 or 10.4%). This improvement is a result of an increase
in average interest-earning assets of $128.1 million over the past twelve
months. For the three months ended June 30, 2009, average interest-earning
assets were $1,090.1 million compared to $962.0 million for the three months
ended June 30, 2008. The resulting net yield on interest-earning assets (on a
fully taxable equivalent basis) decreased to 3.43% in the second quarter of 2009
compared to 3.49% in the second quarter of 2008. Further, the net
interest income figure of $8,629,000 for the second quarter of 2009 represents
an increase of $550,000 (or 6.8%) over the first quarter of 2009. Net interest
income before any provision for loan losses was $17,024,000 for the first six
months of 2009, an increase of $1.8 million, or 11.5%, from the $15,271,000
reported for the first six months of 2008. This is attributable to an increase
in average interest-earning assets of $107.6 million for the first six months
of 2009 as compared to the first six months of 2008, along with the resulting
net yield on interest-earning assets (on a fully taxable equivalent basis)
increasing to 3.48% in the first half of 2009 from 3.44% in the first half of
2008.

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The
Corporations provision for loan loss expense recorded each quarter is
determined by managements evaluation of the risk characteristics of the loan
portfolio. For the second quarter of 2009, PNBC had net charge-offs of
$1,169,000, compared to net charge-offs of $189,000 for the second quarter of
2008. For the six-month comparable periods, PNBC had net charge-offs of
$1,540,000 in 2009 and net charge-offs of $670,000 in 2008. PNBC recorded a
loan loss provision of $1,465,000 in the second quarter of 2009 and $2,635,000
in the first half of 2009 compared to a provision of $450,000 in the second
quarter of 2008 and $818,000 in the first half of 2008. The ratio of
non-performing loans to total loans at June 30, 2009 is 2.88% compared to 1.95%
at June 30, 2008, but has decreased from 4.30% reported on March 31, 2009. The
Corporation has no sub-prime loans in the portfolio, nor is there any sub-prime
exposure in the investment portfolio.

Non-interest
income totaled $3,731,000 for the second quarter of 2009, compared to
$2,751,000 in the second quarter of 2008, an increase of $980,000 (or 35.6%).
Annualized non-interest income as a percentage of average total assets
increased to 1.20% for the second quarter of 2009 from 1.02% for the same
period in 2008. The increase was the result of gains on sales of available-for-sale
securities of $574,000 and an increase in mortgage banking income of $477,000
(due to refinancing activity). Year-to-date in 2009, non-interest income
totaled $6,319,000 compared to $5,904,000 for the first half of 2008, an
increase of $415,000 (or 7.0%). The primary reason for the positive change is
the additional gains on sales of available-for-sale securities of $485,000,
along with an increase in mortgage banking income of $240,000 (or 37.7%) period
over period. This increase in mortgage banking income is after the recording of
an impairment of mortgage servicing rights recorded during the first quarter of
2009 of $556,000. These increases more than offset decreases in the categories
of service charges and trust fees. Annualized non-interest income as a
percentage of average total assets decreased from 1.10% for the first six
months of 2008, to 1.05% for the same period in 2009.

Total
non-interest expense for the second quarter of 2009 was $8,715,000, an increase
of $1,206,000 (or 16.1%) from $7,509,000 in the second quarter of 2008. The
largest increase was in federal insurance assessments, specifically FDIC
premiums, which went up $742,000, or 883.3%. Additionally, the category of
other real estate expenses increased by $328,000 (or 360.4%) over the past
year. Annualized non-interest expense as a percentage of total average assets
increased to 2.81% for the second quarter of 2009, compared to 2.77% for the
same period in 2008. Year-to-date non-interest expense for the first half of
2009 was $17,475,000, an increase of $2,406,000 (or 16.0%) from the $15,069,000
for the first half of 2008. Again, the majority of the increase is in the
categories of federal insurance assessments which rose $1,355,000 (or 806.5%),
and other real estate expenses which increased $387,000 (or 317.2%). Annualized
non-interest expense as a percentage of total average assets also increased to
2.90% for the first six months of 2009, compared to 2.80% for the same period
in 2008.

29

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INCOME TAXES

Income
tax expense totaled $282,000 for the second quarter of 2009, as compared to
$589,000 for the second quarter of 2008. The effective tax rate was 12.9% for
the three month period ended June 30, 2009 and 22.6% for the three month period
ended June 30, 2008. Income tax expense totaled $178,000 for the first six
months of 2009, as compared to $1,177,000 for the first six months of 2008. The
effective tax rate was 5.5% for the six month period ended June 30, 2009 and
22.3% for the six month period ended June 30, 2008. The lower income tax
expense is due to a lower pre-tax income coupled with the effect of tax-exempt
investment interest income. For more information on the Corporations income
taxes see Note 8  Income Taxes in the Notes to Consolidated Financial Statements.

FDIC

On
February 27, 2009, the FDIC adopted a final rule modifying the risk-based
assessment system and setting initial base assessment rates beginning April 1,
2009, at 12 to 50 basis points and, due to extraordinary circumstances,
extended the period of the Restoration Plan to seven years. The Corporations
assessment, according to the new formula is now 14 basis points. Previously,
the quarterly assessment rate was 7 basis points. Accordingly, the new
assessment rates increased the Corporations quarterly federal insurance
expense by approximately $200,000.

On May 22,
2009, the FDIC adopted a final rule imposing a 5 basis point special assessment
on each insured depository institutions assets minus Tier 1 capital as of June
30, 2009. The amount of the special assessment for any institution will not
exceed 10 basis points times the institutions assessment base for the second
quarter 2009. The special assessment will be collected on September 30, 2009.
This assessment equates to a one-time cost of $600,000 and is reflected in the
Corporations income statement for the six months ended June 30, 2009. An
additional special assessment of up to 5 basis points later in 2009 is
probable, which would also be approximately $600,000.

ANALYSIS OF FINANCIAL CONDITION

Total
assets at June 30, 2009 increased to $1,258,054,000 from $1,163,130,000 at
December 31, 2008 (an increase of $94.9 million or 8.2%). Total loan balances
decreased by $25.1 million during the six month period to $765.8 million due to
a general slow-down in the economy, seasonal pay downs in the agricultural
portfolio, and the refinancing of adjustable-rate residential real estate loans
into fixed rate products which are sold in the secondary market. Investment
balances totaled $332,700,000 at June 30, 2009, compared to $251,115,000 at
December 31, 2008 (an increase of $81.6 million or 32.5%), as excess liquidity
is invested due to declining loan demand. Total deposits increased to
$1,055,657,000 at June 30, 2009 from $962,132,000 at December 31, 2008 (an
increase of $93.5 million or 9.7%). Comparing categories of deposits at June
30, 2009 to December 31, 2008, time deposits increased $46.4 million (or 8.5%),
interest-bearing demand deposits increased $42.7 million (or 17.3%), savings
deposits increased $6.1 million (or 9.9%), and demand deposits decreased $1.6
million (or 1.5%). Borrowings, consisting of customer repurchase agreements,
federal funds purchased, notes payable, treasury, tax, and loan (TT&L)
deposits, and Federal Home Loan Bank advances, decreased from $118,016,000 at
December 31, 2008 to $94,633,000 at June 30, 2009 (a decrease of $23.4 million
or 19.8%). The majority of this decrease was due to the repayment of the note
payable (balance of $16.05 million at December 31, 2008) with proceeds from the
sale of preferred stock under the Capital Purchase Program.

30

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CAPITAL PURCHASE PROGRAM

On January
23, 2009, the Corporation received $25,083 of equity capital by issuing to the
United States Department of Treasury 25,083 shares of the Corporations 5.00%
Series B Fixed Rate Cumulative Perpetual Preferred Stock, no par value, with a
liquidation preference of $1,000 per share and a ten-year warrant to purchase
up to 155,025 shares of the Corporations common stock, par value $0.01 per
share, at an exercise price of $24.27 per share. The proceeds received were
allocated to the preferred stock and common stock warrants based on their
relative fair values. The resulting discount on the preferred stock is
amortized against retained earnings and is reflected in the Corporations
consolidated statement of income as Preferred shares dividends, resulting in
additional dilution to the Corporations earnings per common share. The
warrants are immediately exercisable, in whole or in part, over a term of 10
years. The warrants were included in the Corporations diluted average common
shares outstanding (subject to anti-dilution). Both the preferred securities
and warrants were accounted for as additions to the Corporations regulatory
Tier 1 and total capital.

The Series
B Preferred stock is not mandatorily redeemable and will pay cumulative
dividends at a rate of 5% per year for the first five years and 9% per year
thereafter. Any redemption requires Federal Reserve approval. The Series B
Perpetual Preferred stock ranks senior to the Corporations existing authorized
Series A Junior Participating Preferred stock.

A company
that participates must adopt certain standards for executive compensation,
including (a) prohibiting golden parachute payments as defined in the
Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive
Officers; (b) requiring recovery of any compensation paid to senior Executive
Officers based on criteria that is later proven to be materially inaccurate;
(c) prohibiting incentive compensation that encourages unnecessary and
excessive risks that threaten the value of the financial institution; and (d)
accept restrictions on the payment of dividends and the repurchase of common
stock.

ASSET QUALITY

For the six
months ended June 30, 2009, the subsidiary bank charged off $1,640,000 of loans
and had recoveries of $100,000, compared to charge-offs of $769,000 and
recoveries of $99,000 during the six months ended June 30, 2008. The allowance
for loan losses is based on factors that include the overall composition of the
loan portfolio, types of loans, underlying collateral, past loss experience,
loan delinquencies, substandard and doubtful credits, and such other factors
that, in managements reasonable judgment, warrant consideration. The adequacy
of the allowance is monitored monthly. At June 30, 2009, the allowance was
$6,160,000, 28.0% of non-performing loans and 0.80% of total loans, compared
with $5,064,000, 15.3% of non-performing loans and 0.64% of total loans at
December 31, 2008. The increase in the allowance for loan losses as a
percentage of total loans is based on the increase in impaired loans in the
portfolio (discussed below).

Non-performing
loans decreased to $22,021,000 or 2.88% of net loans at June 30, 2009, as
compared to $33,038,000 or 4.18% of net loans at December 31, 2008 (see the
Other Real Estate Owned section below). At June 30, 2009 non-accrual loans were
$21,527,000 compared to $30,383,000 at December 31, 2008. Impaired loans
totaled $6,530,000 at June 30, 2009 compared to $3,540,000 at December 31,
2008. The total amount of loans ninety days or more past due and still accruing
interest at June 30, 2009 was $494,000 compared to $2,655,000 at December 31, 2008.
There was a specific loan loss reserve of $1,530,000 established for impaired
loans as of June 30, 2009 compared to a specific loan loss reserve of $818,000
at December 31, 2008. PNBCs management analyzes the allowance for loan losses
monthly and believes the current level of allowance is adequate to meet
probable losses as of June 30, 2009.

31

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OTHER REAL ESTATE OWNED

At June 30,
2009, the Corporation had other real estate owned of $15,250,000, an increase
of $12.8 million (or 513.2%) since December 31, 2008. Of this increase, $11.0
million represents one commercial loan that was previously listed as a
non-performing loan. This loan was originally a participation with a
up-stream correspondent bank. Based on collateral values, the Corporation
made the decision to purchase their interest and continue with foreclosure. The
Corporation expects the ultimate resolution of this property to have a positive
outcome.

CAPITAL RESOURCES

Federal
regulations require all financial institutions to evaluate capital adequacy by
the risk-based capital method, which makes capital requirements more sensitive
to the differences in the level of risk assets. At June 30, 2009, total
risk-based capital of PNBC was 11.46%, compared to 8.30% at December 31, 2008.
The Tier 1 capital ratio increased from 6.22% at December 31, 2008, to 7.72% at
June 30, 2009. Total stockholders equity to total assets at June 30, 2009
increased to 7.80% from 6.23% at December 31, 2008. The increase in these
ratios is due to the equity investment received from the U.S. Treasury in the
form of Preferred Stock as part of the Capital Purchase Program discussed
above.

LIQUIDITY

Liquidity
is measured by a financial institutions ability to raise funds through
deposits, borrowed funds, capital, or the sale of assets. Additional sources of
liquidity include cash flow from the repayment of loans and the maturity of
investment securities. Major uses of cash include the origination of loans and purchase
of investment securities. Cash flows provided by financing and operating
activities, offset by those used in investing activities, resulted in a net
increase in cash and cash equivalents of $28,409,000 from December 31, 2008 to
June 30, 2009. This increase was primarily the result of the proceeds received
from the issuance of preferred stock, an increase in deposits and a decrease in
loans, offset by net purchases of investments and the pay off of the
Corporations note payable. For more detailed information, see PNBCs
Consolidated Statements of Cash Flows.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK

The
Corporation generates agribusiness, commercial, mortgage and consumer loans to
customers located primarily in North Central Illinois. The Corporations loans
are generally secured by specific items of collateral including real property,
consumer assets and business assets. Although the Corporation has a diversified
loan portfolio, a substantial portion of its debtors ability to honor their
contracts is dependent upon economic conditions in the agricultural industry.

32

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In the
normal course of business to meet the financing needs of its customers, the
subsidiary bank is party to financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The
contract amounts of those instruments reflect the extent of involvement the
subsidiary bank has in particular classes of financial instruments.

The
subsidiary banks exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments. At June 30, 2009, commitments to extend credit and standby letters
of credit were approximately $142,438,000 and $4,552,000 respectively.

Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The subsidiary bank evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, by the subsidiary bank upon extension of credit is based on
managements credit evaluation of the counterparty. Collateral held varies, but
may include real estate, accounts receivable, inventory, property, plant and
equipment, and income-producing properties.

Standby
letters of credit are conditional commitments issued by the subsidiary bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that involved
in extending loan facilities to customers. The subsidiary bank secures the
standby letters of credit with the same collateral used to secure the loan. The
maximum amount of credit that would be extended under standby letters of credit
is equal to the off-balance sheet contract amount. The standby letters of
credit have terms that expire in one year or less.

LAND HELD FOR SALE

The
Corporation owns separate lots in Elburn, Aurora and Somonauk, Illinois that
have been removed from the land balance and are now shown on the Corporations
balance sheet as land held-for-sale, at the lower of cost or market. The land
in Elburn, approximately 2 acres, was purchased in 2003 for $930,000 in
anticipation of the construction of a branch facility. The land in Aurora,
consisting of two lots remaining from the original purchase of fourteen acres
in 2004 which was used to construct a branch facility has a cost basis of
$1,344,000. The land in Somonauk, acquired in 2005 during the acquisition of
FSB Bancorp, Inc., consists of approximately two acres with a cost basis of
$80,000.

LEGAL PROCEEDINGS

There are
various claims pending against the Corporations subsidiary bank, arising in
the normal course of business. Management believes, based upon consultation
with legal counsel, that liabilities arising from these proceedings, if any,
will not be material to the Corporations financial position or results of
operation.

33

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QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

There has been
no material change in market risk since December 31, 2008, as reported in
PNBCs 2008 Annual Report on Form 10-K.

EFFECTS OF INFLATION

The
consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America and practices within the
banking industry which require the measurement of financial condition and
operating results in terms of historical dollars, without considering the
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institutions performance than the
effects of general levels of inflation.

34

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PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

The
following table sets forth (in thousands) details of average balances, interest
income and expense, and resulting annualized yields/costs for the Corporation
for the periods indicated, reported on a fully taxable equivalent basis, using
a tax rate of 34%.


|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------- | - | ------------ |  | ----------------- | ---- | -------- | - | ------------ |  | - | ------ |  |  | ---- | -
|                                                                                                                                                                |  |                                 |          
|                                                                                                                                                                |  | Six Months Ended, June 30, 2009 |           | Six Months Ended, June 30, 2008 |  
|                                                                                                                                                                |  | Average 
 Balance               |           | Interest                        |   | Yield/
 Cost |  | Average 
 Balance |      | Interest |   | Yield/
 Cost | 
|Average Interest-Earning Assets                                                                                                                                 |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Interest-bearing deposits                                                                                                                                       |  | $                               | 47,171    |                                 | $ | 51           |  |                   | 0.22 | %        | $ | 1,672        |  | $ | 21     |  |  | 2.47 | %
|Taxable investment securities                                                                                                                                   |  |                                 | 161,551   |                                 |   | 3,723        |  |                   | 4.65 | %        |   | 154,210      |  |   | 3,297  |  |  | 4.30 | %
|Tax-exempt investment securities                                                                                                                                |  |                                 | 114,108   |                                 |   | 3,673        |  |                   | 6.49 | %        |   | 77,863       |  |   | 3,091  |  |  | 7.98 | %
|Federal funds sold                                                                                                                                              |  |                                 | 192       |                                 |   | 0            |  |                   | 0.00 | %        |   | 2,152        |  |   | 29     |  |  | 2.68 | %
|Net loans                                                                                                                                                       |  |                                 | 741,320   |                                 |   | 22,615       |  |                   | 6.15 | %        |   | 720,843      |  |   | 24,188 |  |  | 6.75 | %
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Total
 interest-earning assets                                                                                                                                  |  |                                 | 1,064,342 |                                 |   | 30,062       |  |                   | 5.70 | %        |   | 956,740      |  |   | 30,626 |  |  | 6.44 | %
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Average non-interest earning assets                                                                                                                             |  |                                 | 151,214   |                                 |   |              |  |                   |      |          |   | 124,640      |  |   |        |  |  |      |  
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Total
 average assets                                                                                                                                           |  | $                               | 1,215,556 |                                 |   |              |  |                   |      |          | $ | 1,081,380    |  |   |        |  |  |      |  
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Average Interest-Bearing Liabilities                                                                                                                            |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Interest-bearing demand deposits                                                                                                                                |  | $                               | 261,839   |                                 |   | 1,569        |  |                   | 1.21 | %        | $ | 252,805      |  |   | 2,428  |  |  | 1.93 | %
|Savings deposits                                                                                                                                                |  |                                 | 65,198    |                                 |   | 25           |  |                   | 0.08 | %        |   | 62,152       |  |   | 38     |  |  | 0.12 | %
|Time deposits                                                                                                                                                   |  |                                 | 579,251   |                                 |   | 8,656        |  |                   | 3.01 | %        |   | 488,364      |  |   | 10,013 |  |  | 4.12 | %
|Interest-bearing demand notes issued to the U.S. Treasury                                                                                                       |  |                                 | 1,034     |                                 |   | 0            |  |                   | 0.00 | %        |   | 995          |  |   | 10     |  |  | 2.06 | %
|Federal funds purchased                                                                                                                                         |  |                                 | 512       |                                 |   | 1            |  |                   | 0.39 | %        |   | 8,009        |  |   | 110    |  |  | 2.77 | %
|Customer repurchase agreements                                                                                                                                  |  |                                 | 32,563    |                                 |   | 176          |  |                   | 1.09 | %        |   | 36,427       |  |   | 402    |  |  | 2.22 | %
|Advances from Federal Home Loan Bank                                                                                                                            |  |                                 | 32,494    |                                 |   | 484          |  |                   | 3.00 | %        |   | 11,046       |  |   | 214    |  |  | 3.89 | %
|Trust preferred securities                                                                                                                                      |  |                                 | 25,000    |                                 |   | 710          |  |                   | 5.73 | %        |   | 25,000       |  |   | 710    |  |  | 5.71 | %
|Note payable                                                                                                                                                    |  |                                 | 4,789     |                                 |   | 96           |  |                   | 4.04 | %        |   | 14,550       |  |   | 343    |  |  | 4.74 | %
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Total
 interest-bearing liabilities                                                                                                                             |  |                                 | 1,002,679 |                                 |   | 11,717       |  |                   | 2.36 | %        |   | 899,348      |  |   | 14,268 |  |  | 3.19 | %
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Net yield on average interest-earning assets                                                                                                                    |  |                                 |           |                                 | $ | 18,345       |  |                   | 3.48 | %        |   |              |  | $ | 16,358 |  |  | 3.44 | %
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Average non-interest-bearing liabilities                                                                                                                        |  |                                 | 118,286   |                                 |   |              |  |                   |      |          |   | 113,031      |  |   |        |  |  |      |  
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Average stockholders equity                                                                                                                                    |  |                                 | 94,591    |                                 |   |              |  |                   |      |          |   | 69,001       |  |   |        |  |  |      |  
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|Total
 average liabilities and stockholders equity                                                                                                             |  | $                               | 1,215,556 |                                 |   |              |  |                   |      |          | $ | 1,081,380    |  |   |        |  |  |      |  
|                                                                                                                                                                |  |                                 |           |                                 |   |              |  |                   |      |          |   |              |  |   |        |  |  |      |  
|The
following table reconciles tax-equivalent net interest income (as shown
above) to net interest income as reported on the Consolidated Statements of
Income.

| |                                       |  |  |  |       |   |        |                                     |   |        |  |  |  |  |  |  |  |  | 
| | ------------------------------------- |  |  |  | ----- | - | ------ | ----------------------------------- | - | ------ |  |  |  |  |  |  |  |  | 
| |                                       |  |  |  |       |   |        | For the Six Months Ended 
 June 30, |   |        |  |  |  |  | 
| |                                       |  |  |  |       |   |        | 2009                                |   | 2008   |  |  |  |  |  |  | 
| | Net
 interest income as stated        |  |  |  |       | $ | 17,024 |                                     | $ | 15,271 |  |  |  |  |  |  | 
| | Tax equivalent adjustment-investments |  |  |  | 1,249 |   |        | 1,051                               |   |        |  |  |  |  | 
| | Tax equivalent adjustment-loans       |  |  |  |       |   | 72     |                                     |   | 36     |  |  |  |  |  |  | 
| |                                       |  |  |  |       |   |        |                                     |   |        |  |  |  |  |  |  |  |  | 
| | Tax
 equivalent net interest income   |  |  |  |       | $ | 18,345 |                                     | $ | 16,358 |  |  |  |  |  |  | 

35

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Schedule 7. Controls and Procedures

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Disclosure
 controls and procedures. We evaluated the effectiveness of the design and
 operation of our disclosure controls and procedures as of June 30, 2009. Our
 disclosure controls and procedures are the controls and other procedures that
 we designed to ensure that we record, process, summarize and report in a
 timely manner the information we must disclose in reports that we file with
 or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer,
 and Todd D. Fanning, Senior Vice-President and Chief Financial Officer,
 reviewed and participated in this evaluation. Based on this evaluation,
 Messrs. Sorcic and Fanning concluded that, as of the date of their
 evaluation, our disclosure controls were effective.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(b) | Internal
 controls. There have not been any significant changes in our internal
 accounting controls or in other factors during the quarter ended June 30,
 2009 that could significantly affect those controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

36

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INDEX TO EXHIBITS

|                 |  |                                                                                                                                          |         | 
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------- | ------- | 
|Exhibit 
 Number |  |                                                                                                                                          | Exhibit | 
|                 |  |                                                                                                                                         
|31.1             |  | Certification
 of Tony J. Sorcic required by Rule 13a-14(a).                                                                            
|                 |  |                                                                                                                                         
|31.2             |  | Certification
 of Todd D. Fanning required by Rule 13a-14(a).                                                                           
|                 |  |                                                                                                                                         
|32.1             |  | Certification
 of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley
 Act of 2002, 18 U.S.C. Section 1350. 
|                 |  |                                                                                                                                         
|32.2             |  | Certification
 of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the
 Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

37

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